FOMC Statement Juices Homebuilding Stocks

Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.

Homebuilders have not shared the same concerns as the FOMC. When Toll Brothers Inc. (NYSE: TOL) reported earnings in late August, earnings per share met estimates, but revenues did not. Still the company forecast full fiscal year revenues up nearly 31%, as its average sales price rose $75,000. Toll Brothers sits at the high-end of the new home market and until mortgage rates rise well above 5% the company could perform well.

PulteGroup Inc. (NYSE: PHM) also expects the housing market to improve. When it reported results in July, the company’s CEO said that the U.S. home market is “solidly on track towards a sustained, long-term recovery” and that the rise in interest rates had “little effect” on buyers. Shares are down about 32.5% since mid-May.

And as we’ve noted before, as home values increase it makes sense for homeowners to update and remodel their homes, whether to sell or to add value for potential sale sometime down the line. Add in the number of existing homes being sold, which new owners often choose to “fix up,” and the outlook for The Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) brightens further.

If the effects of rising interest rates are going to show up in the housing market, as the FOMC seems concerned about, homebuilders are much more optimistic. So are investors. Toll Brothers shares popped 4.5% immediately after the FOMC announcement, to $34.40 in a 52-week range of $28.50 to $39.25. PulteGroup’s shares jumped more than 4% to $17.69 in a 52-week range of $14.23 to $24.47. Shares of both Home Depot and Lowe’s are up about 1.6% as well.