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Playing PulteGroup Stock as Fed's Rate Cut Sparks Housing Boost
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As the Federal Reserve announced its long-anticipated rate cut, markets are abuzz with the potential impact on the housing sector. PulteGroup Inc. (PHM - Free Report) , a leading U.S. homebuilder, finds itself at an intriguing juncture as investors speculate how this policy shift might influence housing demand, construction activity, and ultimately, PulteGroup’s stock performance.
The Federal Reserve announced a quarter-point reduction in its benchmark interest rate yesterday, lowering it to a range of 4.5% to 4.75%. This decision marks the second consecutive rate cut, following a half-point reduction in September, as the Fed aims to stimulate economic growth amid cooling inflation and a moderating labor market.
So far this year, the company’s shares have gained 27.1%, demonstrating impressive resilience amid volatility and mixed industry data. This performance surpasses the Zacks Building Products - Home Builders industry’s 17.5% rise as well as the broader Construction sector's 25.5% increase and the Zacks S&P 500 Composite's 24.7% growth.
PHM’s YTD Share Performance
Image Source: Zacks Investment Research
Factors Acting in Favor of PulteGroup
Focus on Spec (speculative) Approach: PulteGroup’s spec strategy has proven beneficial by enabling the company to meet demand efficiently and manage cycle times effectively, particularly in a fluctuating interest rate environment. The company reported that, at the end of third-quarter 2024, 43% of its homes in production were speculative, aligning with its approach to have ready inventory for quick closing times. This strategy allows PulteGroup to offer homes that can close within 30 to 60 days, which appeals to buyers looking to take advantage of their national rate buy-down program in the current high-interest climate.
Additionally, having a higher percentage of spec homes has helped PulteGroup manage affordability challenges for entry-level buyers, who often prefer move-in-ready options. Furthermore, by shortening its average production cycle time to 114 days in the third quarter (down from 123 days in the second quarter), PHM is on track to meet a target of 100 days in early 2025, enhancing operational efficiency and profitability.
Affordability Incentives: With affordability still a major challenge, PulteGroup increased its use of rate buy-downs to make homeownership more accessible. About 30% of buyers took advantage of the company’s national rate program in the third quarter. By reducing monthly payments, these buy-downs allowed buyers, especially at the entry-level, to navigate higher home prices and elevated mortgage rates.
Diverse Buyer Segments and Regional Strengths: PulteGroup benefits from a diverse buyer mix, with 40% of third-quarter sales from first-time buyers, 39% from move-up buyers, and 21% from active adults. Each segment reacted differently to rate changes, with affordability affecting entry-level buyers the most, while active adults showed caution amid market volatility.
The company’s strong presence in Florida bolstered third-quarter performance despite competition and weather issues. Texas, however, saw higher competition, leading PulteGroup to offer more incentives to sustain sales. The company tailors its incentives by region to address varying demand and affordability.
Apart from the above-mentioned tailwinds, PulteGroup’s increased investment in land and controlled lot options will support its growth targets and increase inventory to meet sustained demand.
What May Pull Back PHM Stock?
High Mortgage Rates: Typically, rate cuts reduce borrowing costs, creating a ripple effect in financial markets. However, while lower rates are generally favorable for homebuilders, the Fed’s cut does not directly translate into lower mortgage rates. Mortgage rates often hinge on long-term Treasury yields, which may not respond immediately or significantly to the Fed's actions.
As of now, mortgage rates remain stubbornly high. The 30-year mortgage rates continued to inch up, reaching 6.79% for the week that ended Nov. 7 from 6.72% last week, according to Freddie Mac. The average rate for a 30-year mortgage in the U.S. increased for the sixth consecutive week, reaching its highest point since early July. As highlighted by Sam Khater, Freddie Mac's chief economist, “As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10%.”
Any Policy Changes: While the Fed's rate cuts aim to support economic growth, external factors such as potential policy changes following the recent presidential election could influence the housing market.
Market Incentives: Incentives remain elevated to boost sales in a competitive environment. PulteGroup’s reliance on these incentives, particularly for entry-level buyers, has pressured margins slightly.
How PulteGroup's Consensus Estimate is Placed
There has been a mixed estimate revision trend for PHM stock over the past 60 days. For 2024, the Zacks Consensus Estimate for PulteGroup’s earnings per share (EPS) has trended upward while downward for 2025.
Image Source: Zacks Investment Research
PulteGroup’s Valuation
PulteGroup’s valuation remains appealing. Despite robust growth in share price year to date, PHM still trades at a price-to-earnings ratio that’s attractive relative to its peers and the broader market. The company has a Value Score of B.
Notably, Lennar Corporation (LEN - Free Report) and NVR, Inc. (NVR - Free Report) are trading at a premium to the industry and D.R. Horton (DHI - Free Report) is trading almost on par with the industry.
Image Source: Zacks Investment Research
Buy, Sell, or Hold PulteGroup Stock
For investors eyeing a play on the housing market, PulteGroup presents a compelling option. With the Federal Reserve’s rate cut, the housing market could see a resurgence in demand, particularly as mortgage rates decrease and affordability improves. PulteGroup’s strong market presence, strategic investments, and favorable valuation suggest it’s well-positioned to capitalize on this boost.
As with any investment, risks remain. Although rate cuts can stimulate housing demand, economic uncertainties still loom. Potential issues, like an unexpected rise in unemployment, could dampen housing market growth. Additionally, if inflation were to spike again, it might lead to renewed pressure on interest rates, which could curb demand in the housing sector.
Image: Bigstock
Playing PulteGroup Stock as Fed's Rate Cut Sparks Housing Boost
As the Federal Reserve announced its long-anticipated rate cut, markets are abuzz with the potential impact on the housing sector. PulteGroup Inc. (PHM - Free Report) , a leading U.S. homebuilder, finds itself at an intriguing juncture as investors speculate how this policy shift might influence housing demand, construction activity, and ultimately, PulteGroup’s stock performance.
The Federal Reserve announced a quarter-point reduction in its benchmark interest rate yesterday, lowering it to a range of 4.5% to 4.75%. This decision marks the second consecutive rate cut, following a half-point reduction in September, as the Fed aims to stimulate economic growth amid cooling inflation and a moderating labor market.
So far this year, the company’s shares have gained 27.1%, demonstrating impressive resilience amid volatility and mixed industry data. This performance surpasses the Zacks Building Products - Home Builders industry’s 17.5% rise as well as the broader Construction sector's 25.5% increase and the Zacks S&P 500 Composite's 24.7% growth.
PHM’s YTD Share Performance
Image Source: Zacks Investment Research
Factors Acting in Favor of PulteGroup
Focus on Spec (speculative) Approach: PulteGroup’s spec strategy has proven beneficial by enabling the company to meet demand efficiently and manage cycle times effectively, particularly in a fluctuating interest rate environment. The company reported that, at the end of third-quarter 2024, 43% of its homes in production were speculative, aligning with its approach to have ready inventory for quick closing times. This strategy allows PulteGroup to offer homes that can close within 30 to 60 days, which appeals to buyers looking to take advantage of their national rate buy-down program in the current high-interest climate.
Additionally, having a higher percentage of spec homes has helped PulteGroup manage affordability challenges for entry-level buyers, who often prefer move-in-ready options. Furthermore, by shortening its average production cycle time to 114 days in the third quarter (down from 123 days in the second quarter), PHM is on track to meet a target of 100 days in early 2025, enhancing operational efficiency and profitability.
Affordability Incentives: With affordability still a major challenge, PulteGroup increased its use of rate buy-downs to make homeownership more accessible. About 30% of buyers took advantage of the company’s national rate program in the third quarter. By reducing monthly payments, these buy-downs allowed buyers, especially at the entry-level, to navigate higher home prices and elevated mortgage rates.
Diverse Buyer Segments and Regional Strengths: PulteGroup benefits from a diverse buyer mix, with 40% of third-quarter sales from first-time buyers, 39% from move-up buyers, and 21% from active adults. Each segment reacted differently to rate changes, with affordability affecting entry-level buyers the most, while active adults showed caution amid market volatility.
The company’s strong presence in Florida bolstered third-quarter performance despite competition and weather issues. Texas, however, saw higher competition, leading PulteGroup to offer more incentives to sustain sales. The company tailors its incentives by region to address varying demand and affordability.
Apart from the above-mentioned tailwinds, PulteGroup’s increased investment in land and controlled lot options will support its growth targets and increase inventory to meet sustained demand.
What May Pull Back PHM Stock?
High Mortgage Rates: Typically, rate cuts reduce borrowing costs, creating a ripple effect in financial markets. However, while lower rates are generally favorable for homebuilders, the Fed’s cut does not directly translate into lower mortgage rates. Mortgage rates often hinge on long-term Treasury yields, which may not respond immediately or significantly to the Fed's actions.
As of now, mortgage rates remain stubbornly high. The 30-year mortgage rates continued to inch up, reaching 6.79% for the week that ended Nov. 7 from 6.72% last week, according to Freddie Mac. The average rate for a 30-year mortgage in the U.S. increased for the sixth consecutive week, reaching its highest point since early July. As highlighted by Sam Khater, Freddie Mac's chief economist, “As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10%.”
Any Policy Changes: While the Fed's rate cuts aim to support economic growth, external factors such as potential policy changes following the recent presidential election could influence the housing market.
Market Incentives: Incentives remain elevated to boost sales in a competitive environment. PulteGroup’s reliance on these incentives, particularly for entry-level buyers, has pressured margins slightly.
How PulteGroup's Consensus Estimate is Placed
There has been a mixed estimate revision trend for PHM stock over the past 60 days. For 2024, the Zacks Consensus Estimate for PulteGroup’s earnings per share (EPS) has trended upward while downward for 2025.
Image Source: Zacks Investment Research
PulteGroup’s Valuation
PulteGroup’s valuation remains appealing. Despite robust growth in share price year to date, PHM still trades at a price-to-earnings ratio that’s attractive relative to its peers and the broader market. The company has a Value Score of B.
Notably, Lennar Corporation (LEN - Free Report) and NVR, Inc. (NVR - Free Report) are trading at a premium to the industry and D.R. Horton (DHI - Free Report) is trading almost on par with the industry.
Image Source: Zacks Investment Research
Buy, Sell, or Hold PulteGroup Stock
For investors eyeing a play on the housing market, PulteGroup presents a compelling option. With the Federal Reserve’s rate cut, the housing market could see a resurgence in demand, particularly as mortgage rates decrease and affordability improves. PulteGroup’s strong market presence, strategic investments, and favorable valuation suggest it’s well-positioned to capitalize on this boost.
As with any investment, risks remain. Although rate cuts can stimulate housing demand, economic uncertainties still loom. Potential issues, like an unexpected rise in unemployment, could dampen housing market growth. Additionally, if inflation were to spike again, it might lead to renewed pressure on interest rates, which could curb demand in the housing sector.
Given these market uncertainties, prospective investors are advised to await a more opportune entry point into this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.