Home is where the heart is — and now, it’s also where investors are putting their money. The housing market has been brutal for homebuyers in recent years, with high interest rates locking homeowners into their current dwellings, making it hard for new buyers to finance, and squeezing homebuilders reliant on bank financing. But things are finally shifting in their favor.

Homebuilders break ground: Homebuilding has been one of the top-performing sectors. The SPDR S&P Homebuilders ETFXHB

is up 40% — significantly outperforming the S&P 500’s 22% gain. In the past two months alone, America’s largest homebuilder, DR HortonDHI

, has surged 36%, making it the third-best performer in the S&P 500 during that time frame. Rate cut expectations this month have been the kindling starting the flame, but political promises are adding fuel to the fire.

• Mortgage rates are already dropping, with 30-year fixed-rate mortgages down to 6.35% as of Aug. 29, compared to 6.95% on Jul. 4.
• Presidential candidate Kamala Harris also recently proposed a plan offering up to $25K in down-payment assistance for first-time buyers and incentives to build 3M new homes.

Housing (And Momentum) Is Building Up…

Despite a projected 16% decline in housing starts this year and a 10% cut in bank lending for residential construction — the largest drop in over a decade — building stocks are pushing ahead… at least in certain areas.

• According to yesterday’s National Association of Home Builders report, multifamily construction permits (like apartments) declined in Q2 2024.
• However, single-family permits grew 17.6% in large metro core counties and 3.4% in micro counties, driven by a “limited amount of existing inventory and pent-up demand for single-family construction.”

Analysts stay optimistic: Yardeni Research favors “overweighting S&P 500 home builders given the direction of interest rates and plenty of pent-up demand.” Bank of America analyst Rafe Jadrosich shares this view, noting, “Homebuilders are trading at the high-end of the historical valuation range, which we think is justified by higher return-on-equity.” He forecasts an average 22% return-on-equity, up from 20% in 2019. In other words, while homebuilder stocks may seem pricey, their expected profitability supports those high market values.