Homebuilders rally as Iran deal cools rate-hike fears

Homebuilder stocks climbed Tuesday after a U.S.-Iran peace memorandum lowered the odds of a Federal Reserve rate hike, traders said.

The S&P Homebuilders Select Industry Index rose 2.1%, its best single-day gain in three weeks. D.R. Horton, the largest U.S. homebuilder by volume, added 3.4%. Lennar gained 2.8%, and PulteGroup rose 2.5%.

The move followed reports that the U.S. and Iran had signed a preliminary agreement to de-escalate tensions in the Persian Gulf. The memo, which both sides described as a confidence-building measure, reduces the risk of a supply disruption in the Strait of Hormuz, through which about 20% of the world's oil passes.

Crude oil futures fell 3.1% on the news, with Brent settling at $78.40 a barrel. Lower oil prices ease inflation pressure, which in turn reduces the probability that the Fed will need to raise rates further. The CME FedWatch tool showed the implied probability of a quarter-point hike at the June meeting fall to 12% from 22% a day earlier.

Homebuilders are acutely sensitive to rate expectations because mortgage rates track the 10-year Treasury yield, which fell 8 basis points to 4.32% on Tuesday. The average 30-year fixed mortgage rate, which had climbed above 7% in April, could ease if the yield decline holds, analysts at Zelman & Associates said.

"The market is pricing out the worst-case scenario for rates," said John Lovallo, an analyst at Bank of America. "If oil stays lower and the Fed stays on hold, homebuilder margins get a reprieve."

The rally extended across the sector. Toll Brothers, which builds luxury homes, rose 3.1%. KB Home gained 2.9%. The iShares U.S. Home Construction ETF (ITB) added 2.3%.

Not all analysts were convinced the move would last. "One memo doesn't change the structural shortage of labor and lots," said Stephen Kim, an analyst at Evercore ISI. "But it does remove a tail risk that was weighing on sentiment."

The next test for the sector comes Thursday, when the National Association of Realtors releases April existing-home sales data. Economists expect a 2.5% decline from March, according to a Bloomberg survey.