Homebuilder stocks surged to record highs on Friday, driven by a positive inflation report that cemented expectations for interest rate cuts in September.

The Personal Consumption Expenditure (PCE) price index — commonly referred to as the Fed's favorite inflation measure — fell from 2.6% year-on-year to 2.5% in June 2024, matching expectations.

The iShares U.S. Home Construction ETF (NYSE:ITB), a key basket tracking U.S. homebuilder equity performances, jumped 3.8%, marking its third consecutive week of gains.

Chart: U.S. Home Construction ETF Reaches Record Highs

Over the past three weeks, U.S. homebuilder stocks have surged by more than 20%, spurred by the anticipation of lower interest rates benefiting rate-sensitive sectors like home construction.

Market participants are now fully pricing in a Federal Reserve rate cut in September, with expectations for at least one more reduction by December 2024.

"Homebuilders are trading at the high-end of the historical valuation range, which we think is justified by higher return-on-equity (ROE). On average, we forecast 22% return-on-equity compared to the 2019 level of 20%," Bank of America analyst Rafe Jadrosich wrote in a recent report.

Historically, similar valuation levels in 2018 and 2021 led to sharp pullbacks as the Fed raised rates, Bank of America highlighted. However, the investment bank believes the scenario is different in the second half of 2024, with the Fed likely to begin cutting rates.

On Friday, Bank of America double-upgraded Mohawk Industries, Inc. (NYSE:MHK) from Underperform to Buy and raised their price target from $120 to $177, following better-than-expected Q2 2024 earnings.

Top-Performing Homebuilder Stocks In July 2024

The top ten best-performing stocks in the U.S. Home Construction ETF this month are:

Latest Mortgage Rates, Housing Market Data

The Mortgage Bankers Association recently reported that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less dropped by 5 basis points to 6.62% for the week ending July 19, 2024.

Despite the easing in borrowing costs, other housing market indicators remain bleak.

Homebuilder confidence dipped to 42 in July, its lowest reading year-to-date, according to Bank of America.

Jeffrey Roach, chief economist for LPL Financial, commented on the situation, stating, "The low supply of homes and high interest rates have depressed affordability to near-term lows."

The National Association of Realtors reported a significant 5.4% decline in existing home sales for June, marking the worst monthly drop since 2022.

Additionally, the U.S. Census Bureau revealed that new single-family home sales fell 0.6% month-over-month to a seasonally adjusted annual rate of 617,000 in June 2024, the lowest in seven months and below forecasts of 640,000, as high prices continued to affect affordability.

The median sales price of existing homes rose 4.1% year-over-year, setting a new record high.

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