Low mortgage rates boost homebuilding stocks despite recession anxiety

The SPDR S&P Homebuilders ETF is up 29 percent for the year

Aug.August 22, 2019 10:46 AM
Homebuilding shares are close to their highest levels of the year thanks to low mortgage rates (Credit: iStock)

Homebuilding shares are close to their highest levels of the year thanks to low mortgage rates (Credit: iStock)

Signs may be pointing to a potential recession, but low mortgage rates have boosted homebuilding shares, which are nearing their highest levels of the year.

A composite of homebuilding stocks — known as the SPDR S&P Homebuilders ETF — is up 29 percent in 2019, far surpassing the S&P 500’s 17 percent gain, according to the Wall Street Journal.

Texas-based LGI Homes, which focuses on first-time buyers, has seen its stock jump 77 percent this year, while Miami-based homebuilder Lennar has increased 32 percent and KB Home has risen 47 percent, the Journal reported.

The rise in homebuilder stock prices is largely due to the fall of mortgage rates which have dropped to their lowest levels since late 2016. This has made it cheaper for homebuyers to buy and refinance a home.

The Federal Reserve’s decision to lower interest rates last month also helps homebuilding stocks because it makes financing cheaper for developers to build homes.

Not all homebuilders are faring well, however. Toll Brothers, which develops luxury homes, saw third quarter net income drop 25 percent from the same time last year. The company which released earnings on Wednesday, said overall contracts were down, but it saw positive signs in a recent move to develop lower-priced properties as it reaches out to higher-earning millennials.

The renewed interest in homebuilders comes as many indicators show the housing market continues to slow because of affordability concerns and rising construction costs.

Just last month, a Case-Shiller index showed home price growth slowed to 3.4 percent in May on a yearly basis, down from 3.5 percent in the previous month.

BuildFax also recently reported that that single-family housing permit authorizations nationally decreased by 2.75 percent in June, year-over-year. [WSJ— Keith Larsen

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