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Homebuilder stocks have been on a tear, handing investors some tremendous gains over the past two years.

Hopefully, you’ve been one of those investors!

Two years ago, I highlighted this area of the market — despite the fact that most investors were avoiding these stocks like the plague. The fear was that higher interest rates would cut into demand and drive home prices lower.

As you know, that’s not at all what happened!

Instead, home prices have been moving higher. And demand continues to be very strong! There are just too many families interested in buying and not enough inventory of homes for sale.

Ironically, high-interest rates have compounded this problem. Because existing homeowners with low fixed mortgage rates have been unwilling to sell. After all, why move when you’re paying a very low-interest rate on your existing home?

Higher home prices have naturally benefited homebuilders. Just take a look at the chart of homebuilder stocks below:

(Click on image to enlarge)

When I wrote the bullish homebuilder article in 2022, I got a lot of pushback on the concept. But now that homebuilder stocks have soared, investors are starting to become more bullish on the area.

Perhaps at the worst possible time!

Shifting Dynamics for Homebuilder Stocks

In a perverse turn of events, the prospect of lower interest rates may now be an anchor that could hold homebuilder stocks back — or possibly drag them sharply lower.

As the Fed prepares to cut its target interest rate later this year, mortgage rates are also likely to drop. Perhaps by a substantial amount.

Lower interest rates will then be the perfect catalyst for existing homeowners to put their houses on the market. Many of these homeowners have been waiting for mortgage rates to drop below 6% or 5% to give them a better shot at moving without a dramatically higher monthly payment.

The end result will likely be more existing homes offered for sale while new homes continue to be built across the country. A shock of new inventory for sale could drive home prices lower and cut profits for homebuilders.

At the same time, a significant amount of multifamily units are set to come online. This could have the effect of reducing rent costs — and creating new (affordable) alternatives for families.

The age-old laws of supply and demand are in play here.

For the last two years, there has been too little supply, and demand has helped to keep prices high. But looking forward, it appears home supply will pick up (thanks to apartments, condos, and existing homes up for sale), and demand is unlikely to match this added supply.

If you’re holding homebuilder stocks, now may be a good time to sell your shares and lock in some attractive profits. Congratulations!

Watching for Signs of a Breakdown

I’m keeping a close eye on homebuilders and related stocks (such as home improvement and home decor plays).

Once these stocks start to turn lower, there could be some big opportunities to profit from falling prices!

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