Shares of housing-related companies Opendoor (OPEN 2.17%), Home Depot (HD -0.10%), and NVR, Inc. (NVR 0.01%) rallied today, up 6.5%, 3%, and 2.1%, respectively, as of 3:20 p.m. EDT. However, all three stocks had been up significantly more earlier in the day. At one point, Opendoor had rocketed 19.2% higher at Wednesday's highs.
These housing-related names all rallied after this morning's softer-than-expected Consumer Price Index (CPI) report from May, which spurred a rally in rate-sensitive stocks like these three. However, the late-day fade in the rally also offers some caution for investors today as well, as commentary from the Federal Reserve's June meeting wasn't quite as enthusiastic.
A softer-than-expected print
In May, the CPI was only flat month over month and up 3.3% year over year. That was softer than the expected 0.1% and 3.4%, respectively. On a "core" basis excluding volatile food and energy prices, inflation was a bit higher at 0.2% month over month and 3.4% year over year. Still, that was also softer than expectations. In response, the yield on the 10-year Treasury bond fell 11 basis points to 4.295%, which helped virtually all long-duration assets, including most stocks.
One sector especially sensitive to rates is the housing sector, as housing prices are negatively correlated to interest rates, and mortgage rates are also largely based on a spread over long-term Treasury rates. Rate sensitivity has been especially true in recent years, as existing homeowners with fixed mortgage rates at much lower levels have likely been reluctant to sell, while higher rates have made buyers less willing to buy, slowing housing market activity to a crawl.
Thus, housing-related stocks tend to get an especially large boost when interest rates move down from their recently elevated rates. Opendoor is essentially a more modernized, digital alternative to a human broker, as it both buys and sells homes directly, lets buyers list their properties on its marketplace, and offers other housing products such as insurance and escrow services. Home Depot offers a very large array of home improvement, lawn and garden, and décor products as the largest home-oriented retailer in the U.S. And NVR is a homebuilder, largely focused on the first-time homebuyer.
So, all three companies would not only see a lift in their stock valuations due to lower long-term rates but should also see increased demand if inflation falls, mortgage rates follow, and housing activity -- building, buying, and selling -- picks up from its low level.
But housing investors don't have the "all-clear" just yet
Despite the good news, there was some other news that may have counteracted the good inflation data early this morning, explaining the late-day fade. The Federal Reserve also released the results of this week's Fed meeting, revealing its expectations for interest rates going forward, or the "dot plot."
On that front, Fed officials now see fewer cuts to the federal funds rate, or near-term interest rate, than it did at the March meeting.
Now, fifteen Fed members see just one rate cut, with eight projecting two, and four projecting no cuts. That's a bit higher than the March meeting numbers when nine officials projected three rate cuts. Moreover, the Fed now sees core inflation averaging 2.8% this year, up from the 2.6% it projected at the March meeting.
While Fed officials do continue to see further progress toward 2% inflation by 2026, it does appear the Central Bank sees interest rates remaining higher for longer and for inflation to be a bit "stickier" than it did three months ago. While today's May inflation print was certainly good news, recent monthly inflation numbers had disappointed to the upside.
If inflation therefore remains higher for longer, that could continue to keep rates high and weigh on demand for housing and housing-related products and services. Thus, it's perhaps not surprising to see today's gains in these housing leaders moderate as we got later in the day.
