The Federal Reserve surprised the markets with a 0.5% rate cut on the Fed Funds rate. Ahead of the cut homebuilders got busy in August as plummeting mortgage rates, which we’ve chronicled here for the past few months, coupled with expectations of the now active Fed rate cutting cycle boosted both single family housing starts and building permits more than expected.
The reverse is happening in the existing home sale market which can’t seem to find a way out of the quagmire caused by high prices and sellers’ unwillingness to exit homes with low mortgages. The most recent existing home sales numbers paint a picture of a flat market, as sales fell 2.5% month over month. In some cases, it’s worse.
It will be interesting to see if the Fed’s rate cut changes consumer behavior toward existing home sales. Yet, given the structural nature of the housing market, it could take a long time before this dynamic is reversed.
In contrast, the numbers for new home sales and housing starts were well above expectations with starts delivering a 9.6% month to month increase (6.5% expected) while permits rose 4.9% (1.0% expected). Digging into the report, single family home starts grabbed the headline, while the rise in permits leaned heavily toward multi-family, suggesting that builders are expecting a continuation of the recent pattern of behavior from cost conscious home seekers.
In other words, it’s still about that monthly payment, and what you get for it. It’s obvious that people who can’t afford to buy are willing to pay premium rents for nice digs while those who can buy a home are more interested in new homes versus older homes which, in some cases cost as much as a new home while often needing repairs and remodeling. Moreover, this type of action confirms and adds a new wrinkle to the structural aspects of the housing shortage, while displaying the ability of builders to diversify into both rental and single family structures, allowing them to capture both sides of the market.
On the Ground
The latest data on the sales of new and existing home sales mirrors what I’m seeing. Existing homes are not moving, while some builders are starting to break ground on new lots while others are in the early stages of development, such as putting in sewage and electrical.
Apartment building remains steady with several of the complexes I’ve been watching getting ready to open. I’ll be paying more attention to these developments as they move toward the tenant recruitment phase.
On the commercial side, the nifty timber project on the busy intersection in the booming DFW suburb of Frisco is now fully landscaped. Yet, there are no signs that anyone has signed a lease.
Lennar Earnings
This afternoon, after the market closes, we’ll get earnings from homebuilder Lennar (LEN), in which I own shares. Expectations are for Q3 revenues of $9.16 billion, with EPS expected $3.68 per share. If LEN delivers as usual, expect a beat of earnings while revenues may be just above or just below expectations. If there is a miss on either, expect lots of happy talk from the company about how the Fed’s rate cut will juice the market and how the company expects the market to improve.
Bonds and Mortgages
The U.S. Ten Year Note yield (TNX) is rising after the Fed’s rate cut. I’m not surprised as the bond market correctly predicted the cut. If TNX remains below 3.9%, there is low risk to stocks.
Mortgage rates just made a new low, clocking in at an average of 6.09%, at levels not seen since October 2023. On the other hand, they may rise slightly next week if bond yields remain above their recent lows.
Homebuilders and REITs
The iShares U.S. Home Construction ETF (ITB) remains in an uptrend, and has broken out to a new high. It is due for a pause, but so far money keeps moving in. Lennar’s earnings will likely be a big influence on this ETF in the short term.
The iShares U.S. Real Estate ETF (IYR) is proving to be more interest rate sensitive than ITB as the pop in bond yields is taking some wind out of its sails. The consolidation I’ve been expecting in this one is likely to lead to a test of the 20-day moving average in the short term.
Bottom Line
Homebuilders remain in the sweet spot as the existing home market can’t seem to get started. We will have to see how the Fed’s rate cut affects that segment of the market.
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