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Exchange-traded funds that hold stocks in the home-building industry surged Thursday amid a drop in Treasury yields following the Federal Reserve’s policy meeting on Wednesday.
Shares of the iShares U.S. Home Construction ETF
ITB
soared 6.2%, while the SPDR S&P Homebuilders ETF
XHB
jumped 5.6%, according to FactSet data. Both funds closed at record highs on Thursday, according to Dow Jones Market Data.
“Homebuilder valuations have increased sharply in the last two months” as the yield on the 10-year Treasury note has dropped a percentage point since Oct. 19, BofA Global Research analysts said in a note Thursday. “The recent re-rating is justified” and could continue, as lower rates may help sales of new homes and the margins of home builders, they said.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
fell to 3.929% on Thursday, the lowest rate since July 26 based on 3 p.m. Eastern time levels as it extended its drop, according to Dow Jones Market Data.
The Federal Reserve said on Wednesday that it was holding its policy rate steady but signaled in its summary of economic projections that it could cut rates by three-quarters of a percentage point in 2024. For home builders, lower rates are probably a tailwind for return on equity in 2024, according to the BofA analysts.
“Homebuilder stocks have outperformed over the last two years despite higher mortgage rates partially because higher rates constrained supply more than demand,” they said. Meanwhile, “homebuilders have effectively used mortgage rate buydowns to offset the affordability headwinds.”
But builders may reduce incentives as mortgage rates decline, benefiting their margins, according to the BofA note.
The top three holdings of the iShares U.S. Home Construction ETF on Dec. 13 were D. R. Horton Inc.
DHI,
Lennar Corp.
LEN,
and NVR Inc.
NVR,
according to data on BlackRock’s website. The SPDR S&P Homebuilders ETF’s three largest exposures were Williams-Sonoma Inc.
WSM,
D. R. Horton and Lennar on the same date, the fund’s holding data on the website of State Street Global Advisors show.
Home builder Lennar was scheduled to release its quarterly earnings results for the period ending Nov. 30 after the market’s close on Thursday. Meanwhile, Lennar’s bonds started moving higher even before the Fed’s announcement on Wednesday, according to BondCliQ.
BONDCLIQ
Shares of the iShares U.S. Home Construction ETF and the SPDR S&P Homebuilders ETF have surged this year, well beyond the U.S. stock market’s gains as measured by the S&P 500.
The S&P 500
SPX
has rallied almost 23% this year through Thursday, while the iShares U.S. Home Construction ETF has rocketed 69.3% and the SPDR S&P Homebuilders ETF has soared 58.7%, FactSet data show.
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