“Wait until next year.” That’s the emerging consensus about the U.S. housing market, which has yet to recover from the 2008-2009 downturn. Prior to that slump, homebuilders typically built around one million single-family homes annually. But according to Credit Suisse, that figure has averaged around 500,000 since then. It’s projected to rise to 635,000 this year.
So what’s holding back demand for single-family homes? Phil Blancato, executive vice-president at Ladenburg Thalmann, points to demographics. “Young buyers are still paying off student loans and older homeowners are downsizing to condos,” he says. Investors are fleeing and many homebuilding stocks are now closer to 52-week lows than 52-week highs.
But this may be the wrong time to throw in the towel. “Over the past few months, we’ve seen a clear improvement in the data,” says Robert Goldsborough, fund analyst for Morningstar. For example, the National Association of Home Builders/Wells Fargo Housing Market Index, which measures builders’ confidence and consumer foot traffic, has steadily risen to a recent 59, up from 45 in the spring. That’s the highest reading for this index in nearly a decade.
Builders point to a key factor behind their rising bullishness: The U.S. job market is also posting the most robust numbers seen in many years, as more than 200,000 net new jobs are being created monthly. Goldsborough adds that sales trends are starting to improve for both new and existing homes. “In the past, you would see strength in one or the other, but not both,” he says.
Of course many newly employed people are still recovering from the 2008 economic crisis, and have been remaining at home with their parents or renting with friends. Indeed, the current rate of new household formation remains at half the 1.2 million annual pace seen in 2000 through 2007.
So when will pent-up demand translate into actual demand? Perhaps sooner than many realize. Analysts at Credit Suisse think current employment trends will help fuel growth in homebuilding to the tune of 8 percent to 10 percent in 2015 and 2016.
And that should be aided by better housing affordability. At the peak of the housing bubble in 2006 and 2007, a typical mortgage consumed 35 percent to 40 percent of median monthly income. Thanks in large part to low interest rates, that figure stands at around 31 percent today, according to the National Association of Realtors. Investors feared that a surge in home prices would start to crimp affordability, but “home price increases have clearly begun to moderate,” Goldsborough says.
With an eye towards the slowly recovering housing market, the newly discounted ETFs that focus on homebuilders have become a more timely investment. To be sure, by the time the housing market is showing more tangible signs of improvement, sector share prices will have already rallied off of their current lows.
Ladenburg’s Blancato pairs his tempered near-term view with a much more bullish long-term view. “The housing market will eventually roar back: The U.S. population keeps growing, the U.S. economy is now growing at a solid pace, and you will see wage inflation start to kick in over the next few years, which boosts purchasing power,” he says.
The ETF choices in this category represent a clear set of alternatives for investors. The iShares U.S. Home Construction ETF (ITB) focuses squarely on the homebuilders themselves, with companies such as Lennar, D.R. Horton, and PulteGroup comprising two-thirds of the portfolio. The remainder of the fund is invested in building material suppliers and D-I-Y retailers.