US housing shares shine as Fed restarts rate cuts

NEW YORK – As the US Federal Reserve restarts interest rate cuts, housing shares are one of the areas of the stock market that may benefit, and they have perked up in recent weeks as markets priced in more monetary easing.

On Wednesday, the US central bank lowered its benchmark rate for the first time since December and indicated more cuts would follow as it tries to shore up a shaky labor market.

The Fed’s move stands to help interest-rate sensitive areas such as small-cap and consumer discretionary shares. Homebuilder stocks could also benefit if monetary easing translates into lower mortgage rates and more robust economic activity that helps the struggling housing sector, investors said.

“The Fed is rebooting the easing cycle,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. “If we think about areas that may stand to benefit from that… homebuilders is one of them.”

The S&P 500 ended on Friday at record high levels, up over 13% on the year, after the Fed cut its benchmark rate by a quarter of a percentage point to the 4-4.25% range. On Thursday, the small-cap Russell 2000 posted a record-high close for the first time in nearly four years.

Some investors hope the restart of monetary easing will boost economically sensitive stocks, broadening market leadership beyond the megacap technology companies that have driven indexes higher.

The PHLX Housing index has jumped 15% so far this quarter, against an over 7% gain for the S&P 500, although the housing gauge still trails the benchmark stock market index on a year-to-date basis.

Big gainers this quarter include DR Horton, up over 30%, and KB Home and Toll Brothers, both up over 20%. Home improvement retailers Lowe’s and Home Depot HD.N are up about 20% and 13% so far in the quarter.

The Mortgage Bankers Association said this week that the contract rate on a 30-year, fixed-rate mortgage fell to 6.39% in the week ended September 12, the lowest since early October 2024, while analysts at Keefe, Bruyette & Woods projected that the mortgage rates could approach 6% by year-end.

The Fed’s move to lower interest rates comes amid signs of struggle in the housing market. US single-family homebuilding plunged to a near 2-1/2-year low in August, data on Wednesday showed. Fed Chair Jerome Powell described housing sector activity as “weak” in a press conference after the central bank’s policy decision.

“If you can get some of those mortgage rates to come down, maybe that breathes a little bit of life back into the housing market,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, adding that getting mortgage rates down in the 5% range was an important threshold.

Investors cautioned that a lower Fed funds rate may not reduce mortgage rates by the same extent, because mortgage rates are more tied to the 10-year US Treasury yield, which is influenced by broader factors. The 10-year Treasury yield was last around 4.13%, down from 4.6% in May.

The extent of Fed rate reductions this year remains unclear, as persistently firm inflation could prompt the central bank to keep rates higher.

Data in the coming week will shed more light on the housing market, including on existing and new home sales.

“A good housing turnover is generally good for economic activity,” said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest Wealth Management. “So we’d like to see those numbers rising consistently.”

Economic data next week includes an updated read of second-quarter gross domestic product, manufacturing and services sector reports, and the personal consumption expenditures price index, a closely watched inflation gauge, while investors will also be watching remarks from Powell on Tuesday.

With the central bank noting it is not on a preset path and a disparity among Fed members about the expected trajectory of rates, “this likely means there will be volatility around forthcoming economic data — especially data on the labor market and inflation,” Seth Basham, director of equity research at Wedbush, said in a note.

(Reporting by Lewis Krauskopf; Editing by David Gregorio)