U.S. Housing Market Poised to Jump on Rate Cuts

In an attempt to keep the U.S. economy expanding and prevent it from slipping into recession, the Federal Reserve has embarked on a program of interest rate cuts. Among the first visible effects of this policy shift on economic activity has been a revival of the housing market, where home sales and home prices now appear to be on an upswing, as lower mortgage rates spur consumer demand.

Home building stocks are rallying as a result. A sampling of leading names, with their year-to-date gains through the close on Sept. 12, 2019 are: Lennar Corp. (LEN), 39.8%, D.R. Horton (DHI), 45.1%, and PulteGroup Inc. (PHM), 35.9%. All these stocks are trading near their 52-week highs. Meanwhile, the iShares U.S. Home Construction ETF (ITB), and the SPDR S&P Homebuilders ETF (XHB) are up by 41.5% and 34.9%, respectively. By comparison, the S&P 500 Index (SPX) has advanced by 20.1%.

Key Takeaways

  • Mortgage interest rates are down, making homes more affordable.
  • Home sales and prices are rising as a result.
  • Housing-related stocks are market leaders in 2019.
  • Home buying among millennials is poised to increase.

Significance For Investors

“Sales of new and existing homes this July were up from a year ago, supported by low mortgage rates and rising family income,” according to Dr. Frank Nothaft, chief economist at real estate data and analytics firm CoreLogic. "With the for-sale inventory remaining low in many markets, the pick-up in buying has nudged price growth up. If low interest rates and rising income continue, then we expect home-price growth will strengthen over the coming year,” he added.

The average annual rate of price increases in U.S. homes is projected to reach 5.4% by July 2020, a sharp improvement from the 3.6% year-over-year (YOY) average increase recorded in July, per CoreLogic. Their Market Condition Indicators (MCI), an analysis of housing values in the 100 largest U.S. metropolitan areas, finds that housing is overvalued in 37% of them, undervalued in 23%, and fairly valued in 40%.

In June, a widely-followed barometer of the national housing market, the S&P 500 CoreLogic Case-Shiller National Home Price Index, registered an average YOY home price increase of 2.1% in June, down from 6.3% one year earlier and the lowest rate of increase since 2012. Major markets with recent price declines include New York, Miami, and Seattle.

Shares of homebuilder Hovnanian Enterprises Inc. (HOV) are down YTD, but they have shot up by 192% since hitting a 52-week low on Aug. 14. Rising revenues and gross margins indicate that "we are moving in the right direction," as Ara K. Hovnanian, chair, president and CEO, stated in that company's fiscal 3Q 2019 earnings release.

Looking Ahead

“Lower rates are certainly making it more affordable to buy homes and millennial buyers are entering the market with increasing force," observes Frank Martell, president and CEO of CoreLogic. "These positive demand drivers, which are occurring against a backdrop of persistent shortages in housing stock, are the major drivers for higher home prices, which will likely continue to rise for the foreseeable future," he continued.

Among millennials, a recent survey sponsored by CoreLogic finds that 26% intend to buy a home within the next 12 months, and 29% plan to rent, while only 8% expect to sell. Nonetheless, their plans may be dashed if the economy, especially the job market, experiences a sharp downturn, restricting their ability to pay down new mortgage debt, even if its comes at an attractive interest rate.

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