LENB Lennar Corporation (Class B)

By Jessica Menton 

Shares of home-building companies are on pace for their best quarter in seven years as a drop in mortgage rates has given home buyers a reprieve.

The SPDR S&P Homebuilders exchange-traded fund, which includes building-products and home-furnishing companies, has rallied 17% this quarter and is on pace to snap a yearlong streak of declines with its best three-month period since 2012.

The ETF was walloped last year, sliding 29%, including a 15% drop in the fourth quarter amid a broad stock selloff. Rising borrowing costs had held back refinancing and weighed on the buying market, slowing the pace of home-price growth.

This year, shares of Beazer Homes USA Inc., Lennar Corp., KB Home and D.R. Horton Inc. have all rebounded, soaring at least 19% apiece, while NVR Inc. and Toll Brothers Inc. have gained 15% and 9%, respectively.

Those stocks face a test this week as investors will get a look at fresh data on pending-home sales and new-home sales on Thursday and Friday, respectively.

Recent data has remained mixed. Housing starts fell 8.7% in February from the prior month, the Commerce Department said Tuesday. Meanwhile, a separate gauge showed home-price growth continued to slow in January. The SPDR S&P Homebuilders ETF was flat Tuesday following the data.

But the housing sector has shown signs of life recently as the spring homebuying season gets under way. Sales of existing homes jumped 11.8% in February from the prior month, suggesting that housing demand has been buoyed by a decline in mortgage rates.

Lower financing costs have helped boost household confidence, with more consumers willing to buy homes or refinance after staying on the sidelines in recent months, some analysts and economists say.

"Home builders have performed well under the assumption that the Fed is going back off on raising rates for a longer period of time, and that should give some relief on mortgage rates," said Derek Maupin, portfolio manager at Hodges Capital Management. "If mortgage rates continue to come back down, we'll probably see more people pull the trigger and buy a home. What's getting priced in the stocks now is that affordability is improving on a long-term basis."

Interest rates on 30-year mortgages have fallen to 13-month lows, which could help spur demand for home builders. The rate for a 30-year fixed-rate mortgage was 4.28% last week, its lowest level since the week ended Feb. 1, 2018, according to Freddie Mac.

A gradual decline in mortgage rates this year has come amid a slump in bond yields, sparked by a dovish Federal Reserve and renewed investor angst over slowing global growth. The yield on the benchmark 10-year U.S. Treasury note, a barometer for mortgage rates, was 2.425% Tuesday, up from 2.418% Monday, the lowest since December 2017. Yields rise as bond prices fall.

Still, home builders face challenges such as labor shortages, rising materials costs and a dearth of inventory. Although those issues are expected to pressure margins again this year, they are likely a short-term headwind, according to Iman Brivanlou, managing director and lead portfolio manager at asset manager TCW Group Inc.

"Typically, margins in this space do rise," Mr. Brivanlou said. "If the cost of borrowing is less, that will definitely help housing demand."

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Write to Jessica Menton at Jessica.Menton@wsj.com

(END) Dow Jones Newswires

March 26, 2019 10:47 ET (14:47 GMT)

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