After a sharp sell-off that pushed the SPDR Homebuilders ETF (NYSE: XHB) toward crucial support near $105 during the early August carry trade unwind panic, the sector has rebounded impressively. Now sitting just 3% away from its 52-week high, XHB is consolidating near a significant breakout zone of around $120. With the potential for a Fed rate cut on the horizon, could the sector see a surge in upside momentum as we head into the end of the year?

The Stage Is Set for Homebuilders to Benefit

Year-to-date, the Homebuilders ETF has posted an impressive 22.7% gain, signaling that momentum is firmly on its side. Since 2022, the sector has been under pressure from rising mortgage rates and escalating building costs. With mortgage rates peaking near 7% in mid-July, the higher borrowing costs and a steady climb in home prices put a damper on new home construction.

However, as of late August, mortgage rates have dipped to 6.5%, and recent positive economic data, along with remarks from Federal Reserve Chairman Jerome Powell, have fueled investor optimism for interest rate cuts. With inflation nearing the Fed's target and economic data exceeding expectations, the likelihood of a rate cut in September has increased, setting the stage for homebuilders to benefit.

The Fed funds rate and the 10-year U.S. Treasury Note yield influence mortgage rates. A reduction in these key rates would likely lower mortgage rates, driving up demand from homebuyers. Additionally, lower inflation and reduced market interest rates ease input costs for homebuilders and provide cheaper credit options for business expansion, creating a potential double benefit for the sector.

So, let's take a closer look at how key players within the sector are positioned to capitalize on this potential positive momentum.

D.R. Horton: A Strong Performer in the Home Building Sector

D.R. Horton (NYSE: DHI) has been a dominant force in the home building industry, operating across key regions in the United States and developing residential homes under various brands. The company, which holds a market capitalization of $62 billion, has strategically shifted its focus toward entry-level, affordable homes. This move has paid off due to strong demand and limited supply. 

This strategy and favorable demographics have propelled DHI to outperform its sector, with the stock up over 24% YTD and now just 2.5% away from its all-time high. With a projected earnings growth of nearly 10% for the entire year and a low P/E of 12.85, DHI presents an attractive option for value investors despite its impressive surge. In its most recent quarterly earnings report on July 18th, 2024, D.R. Horton reported $4.10 earnings per share, beating consensus estimates by $0.35. The company also generated $9.97 billion in revenue, surpassing expectations and marking a 2.5% increase compared to last year's quarter.

PulteGroup’s Strong Performance: Outpacing the Homebuilding Sector

PulteGroup, Inc. (NYSE: PHM) PHM has been a standout performer in the homebuilding industry, outpacing its sector and D.R. Horton with a remarkable 27% surge YTD. The company, which specializes in acquiring and developing land for residential purposes, has benefited from solid demand and a well-balanced operating model. This model effectively aligns the production of build-to-order and quick-move-in homes with demand across various consumer groups, contributing to the company's impressive performance. 

In its most recent earnings report on July 23rd, 2024, PulteGroup reported $3.83 earnings per share, beating consensus estimates by $0.56, with revenue reaching $4.60 billion, up 9.8% from the same quarter last year. With projected earnings growth of 5.27%, a P/E of 10.54, and the stock positioned just 3.5% away from its all-time high, PHM appears poised for further upside.