The housing market has been in a slump this year. But smart business tactics – plus a little help from the Fed – have allowed stock prices for some of the top builders to soar.
It’s a slow summer for the housing market. You wouldn’t know it from homebuilder stocks, though.
Since their April 8 lows, the stocks of many of the largest homebuilders have been on a tear, with the S&P Homebuilders Select Industry Index up 30%. About two-thirds of that has come in just the last three months – as of Sep 22, the homebuilders index is up 17% since June 20, beating the broader S&P’s 12% run.
That disconnect between sluggish home sales and the rising stock prices, analysts say, is the result of two things: optimism that the Fed will cut rates enough to help bring mortgage rates down to more affordable levels and the sector’s tenacity in weathering the economic storm.
“I think you’re seeing the market basically anticipating that lower rates will translate to stronger demand, better affordability and ultimately more profitability for builders,” said Alex Ratner, a managing director at Zelman & Associates
While the Federal Reserve doesn’t directly control mortgage rates, experts widely believe that a cut to short-term rates would translate to lower rates for homebuyers in search of home loans – and better sales for builders.
That belief is leading investors to look past what has been an otherwise lackluster year for home sales. High mortgage rates and economic fears have kept many buyers out of the market, and in August, new housing starts were down 6% from last year. In July, the most recent month available, sales of new single-family homes were down more than 8% from 2024, according to the U.S. Census Bureau.
But for the market, this doesn’t seem to matter. In the past three months, nearly all of the major homebuilders have beaten the S&P 500, though the sector has experienced a pullback in the last week. Since June 20, D.R. Horton, one of the largest homebuilders in the country, has seen its stock climb 32%. Lennar, the second largest builder, is up 14%.
This recent run comes even as those same companies post weak earnings. Lennar, D.R. Horton, and PulteGroup all reported revenue drops of between 4% and 9% in their most recent filings, only to see their stocks rise since then. In July, for instance, D.R. Horton reported its net income had fallen 23% for the year; since then, their stock has climbed almost 7%.
“It’s a good time to buy the homebuilders when homebuilder sentiment is low,” said Bill Smead, founder and chief investment officer of Smead Capital Management, in an interview last week for Yahoo! Finance. “And homebuilder sentiment is low right now because of the difficulty that they’re dealing with.”
Aside from hoping for rate cuts, the market may also be judging many of the big builders on a curve, rewarding them for how they’ve weathered what’s been a turbulent year.
Take tariffs, for instance. Back in March, the industry warned that tariffs could push up the average price for a new home as much as $10,000. But so far, this hasn’t come to pass. Instead, many of the builders seem to be absorbing the high costs, and forcing their suppliers to do the same.
“If you’re selling to D.R. Horton, one of the largest homebuilders, they’re not going to take all that,” said Brian Bernard, director of industrials equity research at Morningstar. “They’re going to push back.”
The public builders have also insulated themselves from some of the normal cyclical housing swings by changing how they buy and hold land. Rather than purchase large tracts that can weigh down balance sheets for years, companies like D.R. Horton and Lennar have started using separate, publicly-traded companies – so-called “land banks” – to buy and hold lots until they’re ready to build.
Bernard said this “asset-light model” gives the companies more flexibility in case the economy turns bad and puts less debt on their books, two things investors like.
“Just with having so much less land on your balance sheet, your returns on invested capital are much higher,” said Bernard.
Strong foundation or a house of cards?
The next few months will be critical for the sector. With the Federal Reserve cutting rates by a quarter of a percentage point at its recent meeting, and with hopes high that more could be on the way, many analysts are cautiously optimistic that the high valuation will prove worthwhile.
“From a stock perspective, we’re fairly neutral on the group right now,” Ratner said. He believes the group will perform mostly in line with the market, and if 2026 brings lower rates and better sales, homebuilder stocks “could continue to grind higher” though without “the outsized returns like we’ve necessarily seen over the last three months or so.”
Some investors worry the stock surge may have run its course, though. Oliver Xin is a twenty-something investor in Toronto who works in the finance industry and writes an investment blog called Thesis Rationale. He said he bought shares of D.R. Horton a few months ago when he saw it was undervalued. He’s not sure it would be quite as good of a deal today, though.
“Right now, I would say it is fairly valued based on the rate cutting expectations of 0.25% to 0.5% in the upcoming months,” he said.
Still, Oliver thinks these stocks could be good for investors who are playing the long game, in part because people always need new homes.
“The demand is still going to be strong in the long-term,” he said. “If you look over the past decades, it keeps going up.”