Gee, what a huge difference a tiny cut can make.
The Federal Reserve’s decision to cut interest rates this week has already proved to be a potent shot in the arm for the US housing market. Mortgage rates fell this week to an average of 6.26% for a 30-year fixed-rate loan, according to Freddie Mac—an 11-month low that has boosted mortgage applications by almost 30% week over week.
This mini-mortgage boom isn’t just a boon to homebuyers, but to builders as well. Weighed down by a double-whammy of sluggish sales and high interest rates on their own loans, single-family home construction plunged to two-and-a-half-year lows in August. But hope is now creeping back into hard-hat zones that prospects could improve soon.
“The rate cut will have a direct, beneficial impact on builders, especially those relying on acquisition, development, and construction loans,” the National Association of Home Builders noted in a statement. “These loans are key to getting new homes built, particularly by private builders, who construct more than 60% of the country’s single-family homes. Lower borrowing costs for builders could help ease housing supply constraints across the country.”
Homebuilder stocks have been gaining steam over the last few weeks in anticipation of lower interest rates unlocking more profits. DR Horton, the largest residential construction company in the US, shot up over 30% this quarter, according to Reuters. Number two KB Home rose 20%, as did luxury builder Toll Brothers. Home improvement megastores Lowe's and Home Depot are also up 21% and 14% this quarter.
Do more rate cuts = more relief?
The Fed hinted at two more rate cuts this year. But that’s no guarantee—and neither are lower mortgage rates.
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Case in point: Back in September 2024, the Fed cut rates for the first time in more than four years; a week later, home loan rates plummeted to two-year lows of 6.08%. But even though the Fed cut rates two more times that year, mortgage rates didn’t keep falling. Instead, by January 2025, they had risen to nearly 7%.
And even if mortgage rates do continue to fall, Fed Chair Jerome Powell has pointed out that monetary policy is no magic pill to solve the housing market’s many problems (like labor shortages, supply chain issues, and high regulatory costs).
In other words, it’s best to treat this Fed cut like a little freshen-upper rather than an Extreme Makeover overhaul.—JD
The housing market and the stock market go together like tacos and Tuesdays. To keep up with all things real estate investing, sign up here to get The Playbook sent to your inbox every Thursday afternoon free of charge.