Blue skies for housing ahead

After spending nearly two years in a deep downturn, the US housing market is about to be jolted to life by a half-percentage point rate cut from the Federal Reserve later this week.

At least that’s the signal being sent by equity markets, as shares closely tied to the fortunes of home-buying activity continue to romp.

Over the last three months, the second-best performing stock in the S&P 500 has been flooring manufacturer Mohawk Industries — up about 40% — with other top-performing housing-related stocks such as credit check company Fair Isaac Corporation — keepers of the FICO scores required for mortgage applications — and home builder DR Horton hovering near the the top of blue chip list with gains of roughly 35%.

A similar dynamic is afoot in the world of small caps, where real estate site Redfin has posted again of more than 120% over the last three months. Home brokerage company ReMax is up nearly 60% in the same period.

Clearly, there’s a sense a Fed shift to fairly aggressive rate cuts — Luke tells us the market-implied odds that the Fed announces a half-point cut on Wednesday afternoon got as high as 70% — is just the tonic the housing market needs.

The logic is compelling. The shock of 30-year fixed mortgage rates leaping to nearly 8% late last year — after being less than 3% just a couple years earlier — flummoxed would be buyers and sellers alike. Those sitting on low rates, were loath to give them up even if they might like to move. Those hoping to buy a house found it tough to stomach paying hundreds of dollars more each month in interest costs than they would have just a couple years earlier. So nobody has been doing much buying or selling.

In July, pending home sales were within spitting distance of the record low posted during the worst moments of the Covid crisis in April 2020. It would seem there’s no where to go but up. On the other hand, given the scale of the moves of some of these stocks, that seems pretty well understood by the markets already.