Homebuilder stocks stage a wild rally amid Fed cut hopes

A torrid rally in homebuilder stocks that's put the group on track for its best month this year shows few signs of stopping. 

Shares of homebuilders have jumped 22% in the 10 days through Monday a rate of expansion last seen in May 2020. A softer-than-expected inflation print earlier in July bolstered bets that the central bank will begin easing sooner than expected. And encouraging results from industry bellwether D.R. Horton Inc. last Thursday sparked optimism about growth prospects for the group. 

Risk-on sentiment in homebuilders was also aided by a broader rotation away from the perceived safety of technology megacaps and into riskier corners of the market earlier this month. 

As a result, the S&P Composite 1500 Homebuilding Index is up 18% so far in July, compared with a 2% gain in the S&P 500 Index. The rally is bad news for industry skeptics who borrow and then sell shares to profit from price declines. Short sellers in the group have seen $750 million in paper losses this month through Thursday, data from S3 Partners show.

"July's homebuilder market rally has wiped all of the profits short sellers had earned in the first six months of the year," Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, said in an email Thursday.

The S&P Composite 1500 Homebuilding Index traded little changed at 11:15 a.m. in New York.

A run-up in mortgage rates and a constrained resale market, with the 30-year fixed just shy of 7%, has enabled builders to capitalize on the fractured U.S. housing landscape. Builders have been buying down customers' mortgage rates to more attractive levels to entice buyers to lock in on a new home. An eventual pullback in the cost to borrow should lessen builders' reliance on incentives to support sales, according to Tyler Batory, an analyst at Oppenheimer & Co.

Earnings season for the sector is off to a generally strong start. Shares of D.R. Horton are going from one record to the next after the homebuilder posted a stronger-than-expected quarterly profit margin. Home construction company PulteGroup Inc. posted earnings that beat estimates.