Homebuilder stocks are rebounding off their near-nine month lows as investors bet on Donald Trump winning his fight with the Federal Reserve over interest rates.
Despite homebuyers’ laments over how expensive buying a home is, Wall Street has driven the homebuilder industry up over 20% in the last three months, confident that further interest rate cuts will drive down mortgages and spur home buying.
S&P 500 vs S&P SPDR Homebuilders ETF
“The market is convinced that we are going to see lower interest rates, and, obviously, lower mortgage rates, and that’s going to revitalize housing,” says Morningstar director of industrials equity research Brian Bernard.
Homebuilder stocks rebounded in 2021 following COVID-19 losses and rose steadily until October 2024 when they started to slump. They fell for the next nine months as mortgage rates hovered around 7% and tariff tantrums threatened the cost of builder materials.
But when mortgage rates reached 11-month lows this August, homebuilder stocks made a turn for the better. It helped too that around this time Warren Buffet’s Berkshire Hathaway revealed a surprise stake in Lennar and D.R. Horton. Combined, the two Berkshire picks were responsible for over a quarter of all new U.S. single-family home closings in 2024.
While mortgage entity Fannie Mae sees rates ending in 2025 and 2026 at 6.4% and 6.0%, respectively, “our economists are just a bit more dovish than that,” says Bernard. “They say we’re going to break below six next year and get to more of five and a quarter or five percent in the next few years.”
Lower mortgage rates would allow homebuilders like Lennar and D.H. Horton who have been offering mortgage rate buydowns to buyers strapped for cash would be able to widen their margins.
“To the extent that we can get lower rates, the key here will be the builders will not need to buy down,” UBS’s homebuilder stock analyst John Lovallo told CNBC this week. “Or they won’t have to buy down as much. That’s where the real kind of juice is, in our opinion.”
Continued mortgage rate slips would also bring about gains in the lower half of the market, says Jonathan Miller, president and CEO of appraisal firm Miller Samuel, Inc. Miller says this half holds “a tremendous amount of pent-up demand.”
Still, there is no certainty that mortgage rates will continue to lower. More Federal rate cuts could drive up inflation, causing the 10-year treasury rate that mortgage rates are based on to surge. Take a look at last September: After a half-point rate cut in the latter half of the month, 10-year treasury rates began to rise and long term mortgage rates increased to nearly 7% by the week of the inauguration.
Federal Funds Effective Rate vs 30-Year Fixed Mortgage Rate
With no clear consensus of which way the Fed’s actions will push mortgage rates, investors are approaching the industry at various angles.
“There is a wonderful pool of future homebuyers out there, and builder sentiment is relatively low, and you want to buy those stocks when they’ve got lots of future customers and there is a lack of optimism,” says Bill Smead, chief investment officer of Smead Capital Management.
Smead’s mutual fund’s top 10 holdings include Lennar, D. R. Horton and NVR Inc. The three homebuilders are up around 10%, 28% and 8%, respectively, over the last three months but have all charted down in the last week.
Matt Scott, a Miami-based retail investor with experience in real estate and finance, is instead bearish on the homebuilder market and has been holding a short position on Lennar. He’s not a believer in the interest-rate-cut-to-lower-mortgage-rate pipeline and he sees the prospects of more rate cuts as a harbinger of a weakening labor market, which would drive down housing demand and put “pressure on the downside for home prices.”
The end of September will also see something else Scott believes “could be a really big catalyst” in the housing market: the end of the Federal Housing Administration COVID-19 loss mitigation policy. The policy has allowed the FHA to make payments on behalf of delinquent borrowers with the amount covered by the FHA getting tacked on to the back of the loan interest-free. On October 1, the FHA will only allow borrowers to get one loss mitigation workout every 24 months. This could mean high foreclosure rates, which would bring more existing homes back to the market and drive down prices on new homes.
Consumer sentiment and hard-data indicators don’t point to fair weather conditions either. For one, the National Association of Homebuilders’ Housing Market Index has continued to lower throughout the year according to an August report, and while traffic of prospective buyers gained two points last month, NAHB says they remain at a “very low level.”
Additionally, the Census Bureau reported that single-family housing starts in August were 7% below the July 2025 rate. Median sales prices of new homes have fallen .06% since the start of the year.
“It’s a weak housing market, yet a modest drop in rates pushes sales a little higher,” says Miller. “This potential drop in mortgage rates is a positive influence on weak market conditions, but it does not solve the problem of an affordability crisis.”