Homebuilder and building product stocks could see an upward trend if the Federal Reserve cuts the key interest rate on Wednesday, based on historical performance, according to a major U.S. bank.
The Fed is expected to lower rates by either 25 or 50 basis points, marking the first change since July 2023 when it raised the rate to a range of 5% to 5.25%.
"Builders and building product stocks have outperformed in anticipation of rate cuts," BofA Securities said in a note on Tuesday.
"Lower rates would benefit home demand."
Homebuilder and building product stocks have rallied since early July as 30-year mortgage rates have fallen from 7% to roughly 6.2%, boosting new home demand and spending on home improvements, BofA said.
"In our view, the stock performance has been stronger than the improvement in underlying fundamentals as investors look through near-term weakness to a 2025 recovery fueled by lower mortgage rates and pent-up demand," the note stated.
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"Housing sector outperformance ahead of rate cuts is consistent with prior cycles, but the magnitude and valuations are higher this time around. Stock performance following the first cut is more mixed although usually positive for homebuilders."
BofA noted that homebuilders outperformed the S&P 500 in the three months before three of the last five initial rate cuts, and building products outperformed in four of the last five.
In the last three months, homebuilder stocks have gone up 26% and building product shares have risen 13%, compared to the S&P 500's 2% uptick over the same period, BofA said.
"Assuming the Fed starts to cut rates in September, homebuilder and building product stocks will be trading at a higher valuation than going into any of the last five periods when the Fed started to cut."
BofA also pointed out that homebuilders and building products typically underperform the S&P 500 ahead of a recession but outperform it during and after a recession.
Price Action: Homebuilder stocks traded higher on Tuesday.
- Pulte Group, Inc. (NYSE:PHM) rose 0.04% to $140.46.
- D.R. Horton, Inc. (NYSE:DHI) was up 0.3% to $195.37.
- Lennar Corporation (NYSE:LEN) gained 1.1% to $189.36.
Building products also saw gains and losses.
- Antelope Enterprise Holdings Ltd. (NASDAQ:AEHL) rose 2.94% to $1.05.
- Interface, Inc. (NASDAQ:TILE) dropped 1.37% to $18.76.
- Technoglass Inc. (NYSE:TGLS) went up 1.12% to $67.51.
The S&P 500, which is tracked by SPDR S&P 500 ETF Trust (NYSE:SPY), was up 0.02% to 5,634.58.
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Image created using artificial intelligence via Midjourney.
