The U.S. housing sector is back in the spotlight as the Federal Reserve restarts interest rate cuts for the first time since December. The Fed’s move has lifted optimism in the stock market, especially for interest-rate sensitive sectors like homebuilding and real estate, which stand to benefit if mortgage rates continue to fall.
On Wednesday, the Federal Reserve lowered its benchmark rate by a quarter percentage point, setting it in the range of 4% to 4.25%. The decision comes as the central bank looks to support a shaky labor market and stimulate growth. Investors expect more cuts in the coming months, which could help ease borrowing costs for both consumers and businesses.
Markets reacted positively to the Fed’s decision. The S&P 500 closed at record highs on Friday, up more than 13% for the year. The small-cap Russell 2000 index also hit its highest close in nearly four years. Meanwhile, the PHLX Housing Index has jumped 15% this quarter, outpacing the broader market’s 7% gain.
Homebuilder stocks have been some of the biggest winners. DR Horton has surged more than 30% this quarter, while KB Home and Toll Brothers are both up over 20%. Home improvement giants Lowe’s and Home Depot are also seeing gains of around 20% and 13% respectively, as investors anticipate stronger demand if mortgage rates continue to decline.
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The Mortgage Bankers Association Report
The Mortgage Bankers Association reported that the average contract rate on a 30-year fixed mortgage dropped to 6.39% in mid-September, the lowest since October 2024. Analysts now believe mortgage rates could fall close to 6% by the end of the year. While this is still high compared to the ultra-low rates seen during the pandemic, it marks a significant improvement for buyers who have been sidelined by rising borrowing costs.
Still, the housing market faces challenges. Data showed that U.S. single-family homebuilding fell to its lowest level in two and a half years in August. Federal Reserve Chair Jerome Powell described housing activity as weak but added that lower mortgage rates could help bring life back into the sector. Market strategists believe that if mortgage rates move closer to 5%, it could trigger stronger housing demand and turnover, which would benefit the broader economy.
However, analysts warn that lower Fed rates do not always translate directly into cheaper mortgages. Mortgage rates are more closely tied to the 10-year U.S. Treasury yield, which has its own drivers, including inflation and global market trends. The 10-year yield recently stood at around 4.13%, down from 4.6% in May, providing some relief but leaving room for uncertainty.
The Fed has made it clear that future moves will depend on upcoming economic data, particularly inflation and labor market strength. Investors will be watching closely this week as fresh numbers on home sales, manufacturing, services, and inflation are released. Powell’s remarks on Tuesday will also be critical in shaping expectations for the next phase of monetary policy.
For now, the restart of rate cuts is breathing optimism into housing-related stocks. As one strategist put it, a healthy housing turnover is generally good for economic activity. If the Fed’s efforts succeed in bringing mortgage rates down further, the housing sector could finally regain some of the momentum it lost over the past two years.
