Real estate rebound sends builder stocks to best month in a year

Homebuilder stocks are headed for their best monthly performance in over a year as the housing market increasingly shows signs of life. 

And Wall Street pros say the rally can keep going regardless of what the Federal Reserve decides to do with interest rates. 

READ MORE: Homebuilders encounter credit, supply cost headwinds

"What we need is not necessarily for rates to decline," UBS Securities analyst John Lovallo said in an interview. "We need rate stabilization and consumer confidence to improve, both of which seem to be happening." 

An index that tracks US homebuilders soared more than 16% in August, far outstripping the S&P 500 Index's 2.3% gain. If the gains hold through the end of session on Friday, that will be the group's strongest such rise since July of last year.

It's quite a turnaround for the group, which entered the month down 3.6% for the year. It's now up some 12% for 2025. Among August's biggest gainers are Champion Homes Inc., M/I Homes Inc., Lennar Corp. and D.R. Horton Inc.

Despite 30-year mortgage rates at a relatively steep 6.6% and home buyers grappling with a lack of affordable supply, signs of recovery are emerging in the housing market. New and existing home sales in July topped forecasts as prices eased. Mortgage rates are drifting lower. And heavy incentives from homebuilders are enticing more buyers off the fence. 

READ MORE: New-home loan applications surge to three-month high

Homebuilders have also continued to capitalize on land-light portfolios, stock buybacks and a housing shortage, driving the stocks to outrun the S&P 500's gains.

Hope Trade

Even further upside in the coming months is likely, according to Lovallo. October through January is a historically strong period for homebuilder stocks as investors anticipate the industry's key spring selling season in what's known as the "hope trade." 

"I'm not saying that we're in the clear and it's gung-ho from here," he said. "But it does feel like we're starting to hit an inflection point."

Even with a challenging economic backdrop featuring high rates, tariff costs and labor concerns, large homebuilders have continued to show discipline in their portfolios, said Cole Smead, chief executive officer of Smead Capital Management, who holds Lennar, D.R. Horton and NVR Inc. 

Their capital structures have remained strong as they've slowed their pace of building in response to the weaker macro environment. And with rents climbing as supply remains tight, home buying demand is expected to pick up.

That said, this rally is being driven by expectations of interest rate cuts from the Fed, not growth, according to Bloomberg Intelligence analyst Drew Reading. And now that the stocks are trading at higher multiples, they're no longer cheap. Homebuilder shares are trading at 1.8 times book value, compared with a long-term average of 1.4 times. 

To justify these levels, lower interest rates remain key. 

"Even a stabilization in interest rates will reduce the cost of the buydowns that these builders are using," Lovallo said. "If we saw rates come down, that would really reduce the cost."