Home Builder Stocks Rise. It’s a Sigh of Relief After Fed Cut Rates.

Home builder stocks rose after the Federal Reserve cut interest rates on Wednesday. (Nick Oxford/Bloomberg)

Key Points

• Home builder shares rose after the Federal Reserve cut interest rates by 0.25 basis points, boosting the iShares U.S. Home Construction ETF by 3.3%.
• The 10-year Treasury yield fell 0.024 percentage point, its largest decline since December 3, signaling potential relief for mortgage rates.
• Major home builders D.R. Horton, Lennar, PulteGroup, and Toll Brothers saw their shares increase by 3.9%, 2.4%, 4%, and 4.3%, respectively.

Shares of home builders rose in the wake of the Federal Reserve’s decision on Wednesday to lower interest rates. A decline in a key indicator of mortgage rate movements is a relief to investors and those eyeing the housing market.

The iShares U.S. Home Construction exchange-traded fund, which tracks home builders and related companies, closed up 3.3% in a gain that accelerated after the Federal Open Market Committee announced a cut to the federal-funds rate by 0.25 basis points.

Wednesday’s drop in the 10-year Treasury yield, which informs the direction of mortgage rates, was a big driver. The 10-year Treasury yield fell 0.024 percentage point on Wednesday, its largest yield decline since Dec. 3, according to Dow Jones Market Data’s measure of 3 p.m. yields. Fixed 30-year mortgage rates measured by Mortgage News Daily fell 0.05 percentage point, to 6.3%, in a reading published late Wednesday afternoon.

One driver in the 10-year yield’s decline was that the FOMC decision was no surprise to traders. “This was an expected move that has likely already been priced in by the debt markets,” Realtor.com senior economist Joel Berner said.

Fed Chairman Jerome Powell’s commentary on the future path of monetary policy likely played a part in builders’ performance as well. “I don’t think that a rate hike is anybody’s base case at this point,” Powell said during the postmeeting press conference.

All of the above is a relief for home buyers and builder investors bracing for bonds’ reactions to the FOMC meeting. Recent central bank meetings have resulted in higher yields and lower prices for the 10-year Treasury, Barron’s recently reported —a trend that frequently resulted in higher mortgage rates for house hunters, even as shorter term interest rates moved down. Those increases came as investors updated their expectations for the economy and monetary policy moving forward.

Relatively high mortgage rates have been a limiting factor for the housing market this year. But, if the trend holds, lower mortgage rates could improve consumers’ prospects of affording a house.

Three of the nation’s large builders were heading higher, with D.R. Horton, Lennar, and PulteGroup closing up 4%, 2.4%, and 4%, respectively.

Toll Brothers, a luxury home builder that reported earnings earlier this week, closed 4.3% higher. The stock, like other builders, may have gotten a boost from the expectation that conditions will improve after all. The company’s stock fell Tuesday on weak guidance, but the company’s chief financial officer noted on an earnings call that it had “not assumed any market improvement in our forecast.”

The real test for housing and home builder stocks will come early next year, when buyers typically return to the housing market—but December’s Fed meeting gave investors something to look forward to.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com