Despite the obstacles faced by the home building sector—elevated mortgage rates and stubbornly high home prices—stocks in this space are hot.
The iShares U.S. Home Construction ETF (ITB) has soared almost 70% over the past year alone, easily beating broader real estate ETFs like the iShares Global REIT ETF (REET) and the Vanguard Real Estate ETF (VNQ). The iShares global REIT gained only 11.13% for the same period while the Vanguard fund logged only13.75%.
With more than $3.2 billion, the iShares home construction fund is the largest ETF by assets focused on home builders. Just behind it are the SPDR S&P Homebuilders ETF (XHB), with $2.07 billion, and the Invesco Building & Construction ETF (PKB), with around $300 million.
Among the top holdings in the iShares U.S. Home Construction ETF are America’s largest home builder, D.R Horton, along with Lennar, Pulte Group and Home Depot.
A tight housing supply and high home prices have kept many would-be home buyers on the sidelines.
Home builders have responded by building cheaper and smaller scale homes. As a result, new home sales have stabilized since December, and the industry outlook is getting more positive.
Builder confidence in the market for newly built single-family homes climbed four points to 48 in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index. This is the highest peak since August 2023.
The Direxion Daily Homebuilders & Supplies Bull 3X ETF (NAIL), which uses daily leverage to seek a return that’s 300% of its index, has responded with an impressive 33.71% gain since the start of the year. The Direxion fund is designed for uber-bullish traders and investors who believe there are more gains ahead in home-building stocks.
A consensus is building that lower U.S. mortgage rates ahead in the coming months will increase housing demand.
“With future expectations of Fed rate cuts in the latter half of 2024, [the National Association of Home Builders] is forecasting that single-family starts will rise about 5% this year,” said the association’s chief economist, Robert Dietz.
Where are mortgage rates headed?
According to the forecast from Fannie Mae Housing, the 30-year fixed rate mortgage will average 6.3% in the second quarter of 2024 and slowly decline over the year, landing at a fourth quarter average of 5.9%.
Mortgage rates under 6% might be enough encouragement to get more home buyers off the sidelines and into a new home.
For their part, home builders are doing everything to stimulate sales by offering buyer incentives. Some of these incentives include free upgrades, where builders offer to pay for the closing costs or give credit for expedited closing.
Looking ahead, some industry observers expect the home-buyer incentives, combined with an increase in single-family housing starts and a shortage of existing homes for sale, to boost new home sales in the coming months.
If all goes as planned, the saying “home sweet home” could be the experience for millions of Americans searching for a cozy place to live.
Ron DeLegge II is the founder of ETFguide.com and author of several books, including Habits of the Investing Greats and Portfolio Architecture: A Handbook for Investors.