Stock market today: Stocks edge higher as new quarter kicks off

Lower interest rates should, in theory, boost the housing market — and, by virtue, housing-related stocks.

If mortgage rates were to drop from current levels, that should incentivize more buyers to buy and sellers to sell. That would be good news for America’s biggest homebuilders like DR Horton (DHI) and Lennar (LEN).

But it’s not that simple. In an interview with Yahoo Finance, Bank of America analyst Rafe Jadrosich explained that the reasons the Federal Reserve was cutting interest rates would be a big factor in determining how much builders would benefit.

“If rates are coming down because the economic environment is really weak, that is not good for homebuilders,” Jadrosich told Yahoo Finance in an interview.

So far the economy has appeared to hold up in the high interest rate environment. But there are some signs of cracks emerging. Recently released retail sales data for May showed the pace of consumer spending is cooling down from last year. And the unemployment rate ticked to its highest level since 2022 during the month. Investors will get their next update on labor market conditions on Friday with the release of the June jobs report.

Last month, Lennar CEO Stuart Miller said on a post-earnings conference call that US consumers were feeling a “little bit more distressed,” noting that the company was seeing “a little bit more credit challenge” among its customers.

Still, an economic downturn is a worst-case scenario.

“If rates are coming lower and the economic backdrop stays strong, that is the ideal environment. Because the cost of buying a house will go lower. Builders will see demand improve. They’ll be able to pull back from … incentives, which is gonna help their margin,” the analyst added.