America's Most Hated Sector Is Prepping for a Rally
Americans are shunning the American Dream...
Last week, real estate data provider Redfin reported that the number of U.S. homeowners has shrunk year over year for the first time in a decade.
The dip was small – just 0.1%. But it still reflects an important shift in consumer behavior...
While homeownership was shrinking, the number of renters rose at one of the fastest rates since the pandemic.
It's easy to see what's driving folks into the arms of landlords... It's just not affordable to buy today.
From 2021 to 2024, the typical monthly mortgage payment soared 67%...
As of this April, it was cheaper to rent than to buy in all the top 50 metro areas in the U.S. And renting is cheaper than owning by an average of 38% nationally.
In short, Americans have legitimate reasons for turning their backs on homeownership.
And with all the headwinds in the sector, buying homebuilding stocks might be out of the question for most investors.
But history says you should pay close attention to homebuilders today... because they could be gearing up for a triple-digit bull run.
When you talk about home affordability, you're really talking about two things at once...
First is the price of the home. This goes up and down with free market dynamics.
But then there's the monthly mortgage payment. This factor depends on interest rates...
When interest rates go up, the 30-year fixed mortgage rate usually rises with them. And between 2021 and 2024, interest rates jumped from 0.25% to 5.5%.
That's why so many buyers are now priced out of the housing market...
But today, the equation is improving.
First off, the mortgage rate has been in decline since 2023. Take a look...
The 30-year fixed mortgage rate is in a downtrend. And for every point it drops, the monthly payment on a house gets a little cheaper.
Federal Reserve Chairman Jerome Powell has also signaled that lower interest rates are on the way.
At the Jackson Hole Economic Symposium last month, he cited a wobbly job market, saying...
With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.
In other words, Powell is willing to cut interest rates sooner rather than later. According to CME's FedWatch tool, the futures market puts the likelihood of a September rate cut at 97.4% as of Friday morning.
Now, here's why investors need to be aware of this story...
Falling Interest Rates Could Spark a Homebuilder Rally
As interest rates come down, homebuilders can absolutely soar.
We can see this tendency using one of America's most respected homebuilders – Lennar (LEN).
Lennar is America's second-largest homebuilder, with a market cap of $36 billion.
Most important for us, Lennar has been a public company since 1971. So we can use it as a stand-in for homebuilders across a wide variety of housing cycles.
To show how falling rates affect the sector, we'll compare Lennar with the U.S. Federal Funds Target Rate. The Fed controls this interest rate, and its action influences interest rates across the board – including the 30-year fixed mortgage.
When the fed-funds rate fell through the mid-'80s, Lennar surged triple digits. Take a look...
Lennar jumped roughly 200% as rates declined.
The pattern also appeared in the falling-rate environment of the early '90s. Take a look...
This time, Lennar climbed more than 600% as rates fell.
And this process played out again in the early 2000s. Take a look...
Again, falling rates spurred Lennar on to triple-digit returns.
No one wants anything to do with Lennar and its peers today. Folks don't even want to own homes right now.
Homebuilding may be the most hated sector in the market, but there are few things more bullish for this sector than falling rates. In this environment, the slightest spark can send homebuilders on a massive rally.
So ignore the bearish narrative surrounding homebuilders today. With interest rates ready to fall, this sector is poised for a monumental shift...
Don't get caught on the sidelines. Add homebuilders to your watch list today.
Good investing,
Sean Michael Cummings
Further Reading
"You can always find a reason to fear that the boom is over," Brett Eversole writes. But today, more than just the big-name stocks are breaking out across the market. That's the hallmark of a healthy bull run... and proof that this rally still has plenty of room to run.
A rare pullback has knocked one blue-chip stock into oversold territory. And history shows this is the type of setup that often leads to a strong rebound. While this stock has quietly outperformed the market for decades, this hidden winner is now offering investors a rare chance to buy in at a discount.
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