With Rate Cuts Ahead, Buffett-Backed Builders Look Like a Buy

Key Points

• 30-year fixed-rate mortgages haven’t been seen in nearly three years, but that could change early next year.
• If the Federal Reserve cuts its benchmark interest rate this month, it could spark homebuilders presented with lower borrowing costs. 
• Two of the largest stocks in this space recently got a big vote of confidence from Warren Buffett.

Between elevated rates and historically high home prices, the housing market has deterred buyers, many of whom are uncomfortable assuming a 30-year fixed-rate mortgage above 6%, according to the National Association of Realtors (NAR). 

Another deterrent is housing supply—or lack thereof. In July, Zillow reported that the U.S. housing shortage hit a record deficit of 4.7 million homes. Fortunately, help for real estate buyers (and investors eyeing homebuilder stocks) is on the way. 

The odds of an interest rate cut happening at the Federal Reserve’s September meeting stand at nearly 90%. However, 6% fixed rates aren’t likely before early 2026, per the NAR. So homebuyers may have to continue waiting. However, if rate cuts materialize later this month, homebuilders may be able to start addressing the housing deficit sooner than later. 

That might have contributed to Warren Buffett's recent nearly $1 billion bet on two of them.  

Lower Rates Don’t Necessarily Mean Lower Mortgages

Many assume that a lower effective federal funds rate (EFFR)—the Fed’s benchmark—translates into lower rates for a spectrum of debt, including car loans, credit cards, and mortgages. But during the central bank’s last rate-cutting cycle from September 2024 to December 2024, that didn’t happen. 

Instead, mortgage rates increased. FRED data from that cycle shows 30-year fixed rate mortgages went from a monthly low of 6.08% in September to a monthly high of 6.85% that December. 

Historically, though, when the Fed cuts the EFFR, mortgage rates follow. But that isn’t the only factor. Mortgage rates are impacted—to a greater extent—by the 10-year Treasury. That 10-year note doesn’t precisely reflect what borrowers repay, but when its yield increases/decreases, mortgage rates mirror that, albeit within a predetermined spread of each other.  

Lower Rates Do Mean Lower Borrowing Costs for Homebuilders

On the other hand, homebuilders are poised to profit from cuts. Lower rates beget lower borrowing costs for new construction projects and present opportunities to refinance existing debt at more attractive rates. Once those projects come to fruition, lower mortgage rates in early 2026 will incentivize buyers, thereby accelerating sales. 

That’s important. One factor that’s contributed to negative sentiment around homebuilder stocks over the past year has been mounting carrying costs—the expenses incurred by financing and holding property (e.g., the cost of land and construction) as well as ongoing expenses (e.g., property taxes, insurance, and utilities). Carrying costs are recouped through sales. Faster sales mean improved cash flow and the opportunity for capital reinvestment (e.g., new construction projects). That’s what increases profitability for homebuilders and shareholders alike. 

So while rate cuts are unlikely to immediately affect homebuyers’ borrowing costs, the leverage they’ll provide homebuilders could help begin to address the housing shortage while seeing inflows into their stocks. That’s perhaps why two of the largest companies in this space recently got a big vote of confidence from Buffett.

Lennar: Climbing Back From a 1-Year Low

In its most recent Form 13F filing, Berkshire Hathaway showed an $800 million position in Lennar NYSE: LEN. Buffett’s not alone. Institutional ownership stands at 81.10%, with buyers (613) outnumbering sellers (381) over the past 12 months. 

Much of that may have to do with the stock’s recent performance. Since its YTD low in April, Lennar is up 29.56%. However, the stock remains down 25.26% from its all-time high in September 2024. So there’s plenty of room until it retests that high. 

Fundamentally, LEN’s recovering from the post-pandemic housing boom. Net income decreased 11.21% from $4.430 billion in 2021 to $3.933 billion in 2024. But consistent dividend payments of $130–$160 million quarterly indicate a shareholder-friendly approach and stable cash flow management. That dividend currently yields 1.50%, or $2 per share annually. 

Lennar’s earnings are expected to grow 24.60% next year, from $12.48 per share to $15.55 per share.

More in Store for D.R. Horton

At $191.50 million, Berkshire’s stake in D.R. Horton NYSE: DHI is significantly lower but notable nonetheless. Institutional ownership is higher than Lennar's at 90.63%, with buyers (82) outnumbering sellers (607) over the past 12 months. 

After also hitting its all-time high in September 2024, DHI fell 39% before bottoming on April 8, 2025. Since then, the stock’s up 47.25% through the last trading day of August. It’s still down 13% from that all-time high, suggesting there’s momentum en route to retesting resistance. 

Despite the housing slowdown, DHI has managed to increase net income from $4.176 billion in 2022 to $4.756 billion in 2024—good for a 13.88% increase. More recently, D.R. Horton beat on earnings in Q2 but missed on revenue, which fell 7.4% year-over-year. 

But earnings are rear-facing; the macro environment should be conducive to DHI expanding profit margins and rewarding shareholders going forward. The company’s expected to grow earnings 10.74% next year from $13.04 per share to $14.44 per share. 

Meanwhile, its dividend currently yields 0.94%, or $1.60 per share annually.