Homebuilders experienced a significant surge of over 6% due to mortgage rates reaching an 11-month low, while REITs showed mixed performance.

Homebuilding Stocks Advance as Mortgage Rates Decline and Rate Cut Expectations Build

U.S. homebuilding equities experienced significant gains on Friday, with the sector surging over 6% as 30-year mortgage rates tumbled to an 11-month low. This positive movement was largely influenced by remarks from Federal Reserve Chair Jerome Powell, signaling a potential shift in monetary policy. Real Estate Investment Trusts (REITs), however, displayed a mixed performance, indicating nuanced impacts across the broader real estate sector.

The Event in Detail

The homebuilding sector witnessed a robust rally, driven by optimistic market interpretations of central bank policy. Rocket Companies (RKT) jumped 8%, leading gains among housing-related stocks. Mr. Cooper Group (COOP) and Beazer Homes (BZH) both climbed 6%. Other significant advances were seen in KB Home (KBH) and Lennar (LEN), each rising 4%, while PulteGroup (PHM) and D.R. Horton (DHI) added 3% apiece.

Concurrently, mortgage rates experienced a notable decline. The national average for 30-year new purchase mortgages fell 11 basis points on Friday to 6.48%, marking an 18-point drop over just three days. This represents the lowest level since October 4, 2024, when the flagship average stood at 6.43%.

In contrast, the REIT sector demonstrated a divergent performance in Q3 2025. Sub-sectors like Data Centers and Industrial REITs emerged as leaders, posting strong Funds From Operations (FFO) growth of 21.3% and 8.0% year-over-year, respectively, driven by secular demand for artificial intelligence (AI). Digital Realty Trust (DLR) reported Q3 FFO per share of $1.89, an 18.2% year-over-year growth, and Equinix (EQIX) delivered 24.1% FFO growth. Conversely, Office REITs continued to face significant headwinds, experiencing a -5.5% FFO growth and -19.7% year-to-date returns through Q3 2025, largely due to structural demand challenges from hybrid work models. Hotel REITs, despite a 12.0% Q3 FFO growth, posted -18.8% year-to-date returns.

Analysis of Market Reaction

The primary catalyst for the homebuilding sector's surge was Federal Reserve Chair Jerome Powell's closely watched speech at the Jackson Hole Symposium. Powell's indications of a potential interest rate cut, possibly as early as September, were interpreted by investors as a signal that the central bank is preparing to ease its tight monetary policy. While acknowledging inflation risks, Powell's remarks on growing risks to the labor market fueled optimism that the Fed might lower borrowing costs.

The housing sector is particularly sensitive to interest rate fluctuations. Lower mortgage rates directly reduce the cost of homeownership, thereby stimulating demand and activity within the housing market. This anticipation of reduced borrowing costs directly translated into increased investor confidence in homebuilding companies. Markets are currently pricing in a near-certain quarter-point cut at the central bank's September 17th meeting, with a majority expecting reductions totaling at least 0.75 percentage points by year-end.

Broader Context and Implications

The recent movements underscore a broader market expectation of future rate cuts, which could impact various interest-rate sensitive sectors beyond just homebuilding. While the homebuilding industry faces ongoing challenges such as elevated mortgage rates, cautious consumer sentiment, rising construction costs, labor shortages, and limited lot availability, the prospect of lower rates provides a significant tailwind. Industry fundamentals, including tight housing supply and steady underlying demand for homeownership, are expected to provide long-term support. Builders are adapting by employing mortgage buydown programs and balancing speculative and build-to-order activities.

The market's enthusiasm for homebuilders is reflected in valuations. For instance, PulteGroup (PHM) now trades at a price-to-earnings (P/E) ratio of 10.5x, above the homebuilder industry average of 8.5x, suggesting higher market expectations for its future earnings growth.

Expert Commentary

Analysts have begun to reflect this evolving optimism in their assessments. Sam Reid from Wells Fargo & Co. issued an Overweight rating for PulteGroup, with a price target of $150 per share, implying a 7% upside.

"The market is now comfortable with paying a premium to access PulteGroup's future earnings growth," he noted, highlighting the shift in investor sentiment.

Looking Ahead

The trajectory of interest rates, particularly the Federal Reserve's decisions in upcoming meetings, will remain a critical determinant for the housing market and other rate-sensitive sectors. While mortgage rates don't always move precisely in sync with Fed policy, being largely influenced by bond yields and broader economic forces, the current trend of declining rates is a significant factor. Investors will closely monitor further economic reports and central bank communications for additional clues on the pace and extent of future rate adjustments. The current environment presents both opportunities, particularly for adaptable homebuilders, and continued complexities, especially for certain segments of the commercial real estate market.