Fed Cut Looms, Mortgage Rates Sink: Are Homebuilder ETFs The Hidden Trade?

Mortgage rates have sunk to their lowest point in almost a year, prompting the question of how long the trend will continue, and whether housing and mortgage finance-linked ETFs might reap the benefits.

The iShares U.S. Home Construction ETF ITB and SPDR S&P Homebuilders ETF XHB are usually considered to be straight plays on housing affordability. Both monitor top-shelf U.S. builders like D.R. Horton Inc DHI, Lennar Corp LEN, and PulteGroup Inc PHM, firms whose revenue can turn meaningfully on the basis of borrowing costs. If lower mortgages lure buyers into the market, homebuilder ETFs can exhibit increased momentum.

Also Read: Inflation And Unemployment Are Soaring–And The Fed Is Now Trapped

Mortgage REIT funds, such as the VanEck Mortgage REIT Income ETF MORT and the iShares Mortgage Real Estate ETF REM, may benefit as well. These ETFs invest in firms that borrow short-term and lend into the mortgage market. Lower rates tend to decrease their financing expenses and expand spreads, which can support dividends, a principal attraction for income investors.

What Happened

The environment has turned rapidly. The average 30-year fixed mortgage fell to 6.35% last week, from 6.5%, Freddie Mac data showed. The 15-year rate fell to 5.5%. Both are the lowest since October 2024. The reduction followed the Bureau of Labor Statistics’ report that the economy created only 22,000 jobs in August, while revisions wiped out most of the summer’s earlier reported gains. Treasury yields continued their descent as jobless claims increased, indicating a cooling labor market.

Borrowers have already acted. According to Yahoo Finance, the Mortgage Bankers Association said purchase applications rose 7% from the previous week and 23% compared with a year ago. Refinancing applications rose 12% on a weekly basis and 34% compared with a year ago.

Markets currently are factoring in a 100% chance of a Fed rate reduction on Sept. 17, according to the CME FedWatch tool. Last year, in October, even as the Fed’s rates were being cut, the 30-year fixed rate mortgage saw a sharp weekly jump, per Freddie Mac. For investors in ETFs, the question is whether declining mortgage rates will continue to drive housing activity, or if, as occurred last year, rates bounce back even after the Fed loosens policy.

• Oracle’s 40% Moonshot Put Defiance’s ORCX ETF On The Map

Image created using artificial intelligence via Midjourney.