Homebuyers got their hopes up in September when the Fed lowered its key lending rate. The lower rates would surely be followed by more rate cuts bringing the dream of homebuying back within their reach.
It didn’t happen.
Fears of inflation, an ongoing bear market in the bond market and other musings from the Fed brought another surge in interest rates, and the mortgage applications dried up again.
This morning CNBC reports that applications for home mortgages have jumped 12% as rates on the 30 year have dropped to 6.86% from 6.9%.
Furthermore, mortgage applications are 52% higher than they were a year ago.
There are two stories there, both good for would-be homeowners and the homebuilding companies.
For the year, homebuilders like Toll Brothers (TOL), Beazer Homes (BZH) and Lennar (LEN) have been busy swinging hammers to complete homes as they build inventory.
The inventory building started long ago during the pandemic. Homebuilders struggled with obtaining materials and workers, slowing their construction timelines followed by a slowdown in their business.
Then, a boom in the demand for homes as homeowners looked to move away from city centers as the pandemic slowed.
Home inventory has also been throttled by the huge increase that America has seen in second, third and even more homes per family. Part of this is attributed to the surge in Airbnb and other temporary rental companies enabling homeowners to turn their extra homes into a business.
Current homeowners have held off from putting the “For Sale” sign in front of their homes as many of them have mortgages in the 3% or lower range. It just hasn’t made sense to sell those houses to get into a new house with a higher mortgage rate.
The Fed has voiced its concern over inflation in 2025. To put it short, tariffs and the pressure of full employment are likely to keep prices moving higher. The result may be a Fed that is stuck with interest rates close to where they are right now.
That would be a setback to the homebuilders.
There’s a “Magic Number” when it comes to what is going to trigger an avalanche of home sales in 2025.
One Single number that will get all of the homeowners that have been waiting to sell and the prospective buyers that have been living in apartments for the last three years to all move at once.
Talk to any Realtor or banker and they’ll tell you that the market is going to jump to life as soon as rates move below 6%. Call it the psychological trigger that homebuyers are waiting for that when hit will drive the sellers and buyers into the market at once.
Currently, the rate stands at 6.89%. The Fed meeting next week is a 50/50 proposition as to whether Jerome Powell will drop rates another 0.25% before the end of the year.
We’re clearly looking at a spring 2025 situation at the earliest for rates to hit 6%, which couldn’t be timed any better.
In most of the U.S., the unofficial start of homebuying season starts in February. Last year’s sales saw a surge in activity, despite higher interest rates. This year, a rate close to, or lower than, 6% will send the market into action.
Homeowners looking to lock in higher prices will start to sell. Renters will move quickly to buy and the homebuilders will start to unload their inventories without the need for special deals and incentives.
The last group is the winner here.
Lennar and Beazer Homes are builders that serve a wide swath of the housing market.
Lennar focuses on building single and multiple family dwellings while Beazer Homes offers personalized home experiences, allowing buyers to customize their living spaces without the premium price tag typically associated with “bespoke” construction.
This flexibility appeals to a broad market segment, from first-time buyers to those looking to upgrade.
Both companies have performed well through 2024 and both boast a strong inventory as construction through 2024 has remained strong while sales have been quiet.
Toll Brothers (TOL) is better known for catering to a niche market of luxury home buyers. The company offers bespoke designs that allow for extensive customization.
Toll Brothers homes are often characterized by high-end materials, sophisticated architectural details, and premium features that appeal to discerning consumers.
The company’s smaller niche market has allowed Toll Brothers to see stronger sales through the higher interest rate environment as it operates its own financing company.
Currently, Toll Brothers and Beazer Homes are the two technically stronger stocks.
Shares of Beazer Homes recently started a new bull market trend higher as the stock is breaking above $35. The buying is the result of investors looking forward to the beginning of the year buying activity that Beazer and other builders will experience.
Shares are trading above their 50- and 200-day moving averages with the 50-day is a strong bullish trend.
Investors should expect a target of $45 for Beazer Homes.
Toll Brothers is the second strong candidate in the Home Builders.
Shares are trading 35% over the last year and in a strong bull market trend.
Toll Brothers stock spent the last three months trading in a range with $160 as its top. The stock just jumped above that resistance level this week as investors are anticipating lower rates will open to more house sales.
The company is set to announce its earnings on December 9. Last quarter’s results were better than analyst expectations and management upgraded their outlook for the company’s current quarter.
Investors should expect a robust outlook for Toll Brothers given the improving economy, consumer confidence and lower interest rates on the horizon.
Shares of Toll Brothers are shifting into a new short-term bull market trend that will target the $200 price level.
