Wednesday’s Federal Reserve decision could mark the end of this rate hiking cycle and add more fuel to a homebuilder trade that has been a big winner for investors in 2023. Traders expect the Federal Reserve to hike rates by another quarter point at the conclusion of policymakers’ two-day meeting and then pause, with possible rate cuts coming later in the year, according to the CME FedWatch Tool. Mortgage rates are tied indirectly to the Fed through the yield on the 10-year Treasury note, and could still move around while the central bank is paused. But firm guidance from the the central bank that it’s stopping the current campaign and assessing future economic conditions could give some needed certainty to potential homebuyers and help boost shares of homebuilders. The ETFs that track the industry have already outperformed this year, rebounding from dramatic declines in 2022. The rapid Fed rate hikes last year appeared to spook consumers, who saw their future monthly payments climb sharply just while they were in the midst of searching for new homes. But the housing market has shown signs of a rebound in recent months. After losing 26% last year, the iShares U.S. Home Construction ETF (ITB) has a total return of more than 24% year to date. The SPDR S & P Homebuilders ETF (XHB) is up nearly 17% after slumping 29% last year. ITB YTD mountain Homebuilder ETFs like the ITB have outperformed in 2023. While there is concern among Wall Street analysts that homebuilders have already priced in this positive news, strong first-quarter reports from major companies including PulteGroup and D.R. Horton last month led to some of those same analysts hiking their earnings estimates and stock price targets. And a relatively stable interest rate outlook should make it easier for the homebuilders to hit those raised estimates, according to their own executives. “Home sales are benefiting from recent declines in mortgage rates, but I also think just having a general sense of stability in rates is important to consumer confidence,” PulteGroup CEO Ryan Marshall said in an earnings call last month. And at D.R. Horton, homebuyers are getting more aggressive at committing to homes before they are even built, which could be another sign that stable rates are boosting confidence. “I think we are seeing some buyers willing to buy earlier in the production process. There’s been a little bit of stability in market rates, and they feel good about that. But the better thing for us is we’re seeing our cycle times improve,” Michael Murray, the co-COO at D.R. Horton, said on its earnings call. To be sure, homeowners looking to sell and trade up to a larger house, or downsize to a smaller one, may still stay on the sidelines until the Fed actually cuts rates, particularly those who already have low-priced fixed-rate mortgages. There is also a possibility of a recession later this year or in early 2024, which could hurt demand for homes more broadly.
