5 Homebuilders to Watch on Interest Rate Cut Expectations

Homebuilding Industry Overview - The homebuilding industry has been negatively impacted by rising mortgage rates and escalating building costs since early 2022, leading to the lowest level of housing starts in May in nearly four years [1] - Mortgage rates peaked at nearly 7% in early May 2023, contributing to a decline in new home construction [1] Inflation Data - The consumer price index (CPI) decreased by 0.1% month over month in June, marking the first monthly decrease since May 2020, with a year-over-year increase of 3% [2] - The core CPI rose by 0.1% month over month in June, with a year-over-year increase of 3.3%, the smallest since April 2021 [2] - The core personal consumption expenditure (PCE) price index rose by 0.1% month over month in May, with a year-over-year increase of 2.6%, the lowest since March 2021 [3] Rate Cut Expectations - Economists are advocating for the Federal Reserve to reduce the benchmark lending rate from its current range of 5.25-5.5%, the highest in 23 years, to prevent a potential recession [4] - The probability of a Fed fund rate cut by 25 basis points in September is currently at 96.3%, up from around 62% two weeks prior [4] Impact on Homebuilders - Lower mortgage rates, influenced by potential Fed rate cuts, are expected to increase demand from homebuyers [5] - Reduced inflation and market interest rates will lower input costs for homebuilders and provide cheaper credit sources for business expansion [5] Homebuilder Stocks - Five homebuilder stocks with strong growth potential have been identified, all showing positive earnings estimate revisions in the last 60 days [6] - D.R. Horton Inc. (DHI) is benefiting from limited supply and strong demand for affordable homes, with expected revenue and earnings growth rates of 4.5% and 3.4%, respectively [7] - KB Home (KBH) is positioned for growth due to its Returns-Focused Growth Plan, with expected revenue and earnings growth rates of 4.5% and 18.2%, respectively [8] - NVR Inc. (NVR) is experiencing improved demand trends, with a backlog increase of 7% year-over-year and expected revenue and earnings growth rates of 8.6% and 6.6%, respectively [9] - PulteGroup Inc. (PHM) raised its 2024 guidance for closings to nearly 31,000 homes, with expected revenue and earnings growth rates of 7.9% and 10%, respectively [11] - Toll Brothers Inc. (TOL) focuses on affordable luxury communities and plans to return cash to shareholders, with expected revenue and earnings growth rates of 4.6% and 14.2%, respectively [12]