Back to top

Image: Bigstock

Housing Stocks & ETFs Will Likely Surge: Here's Why

Read MoreHide Full Article

Homebuilding stocks have been on a roller coaster ride in the past few weeks, as the supply chain disruptions and higher rates have affected the demand and supply of homes. Amid high home prices and rates, monthly existing-home sales fell for the fourth consecutive month in September. However, recent trends suggest a potential rebound amid a sparse housing market.

The pain is probably over for this sector. The housing ETF SPDR S&P Homebuilders ETF (XHB - Free Report) added about 10.1% last week while homebuilder stocks like DR Horton (DHI - Free Report) , Toll Brothers (TOL - Free Report) , KB Home (KBH - Free Report) and Lennar (LEN - Free Report) jumped more than 16%, 17%, 17% and 14%, respectively.

The year 2024 will also be a strong year for homebuilders. Here are some reasons why homebuilding stocks could be a good investment in the coming months.

Fed Done Raising Rates?

The bets that the Fed is done raising rates strengthened on softer jobs data for the month of October. The Fed announced on Nov 1, 2023, that it would keep its benchmark interest rate within the range of 5.25% to 5.50%.

This marks the highest interest rate level in over two decades. Though the central bank has left the door open for potential future actions as it continues to grapple with the persistent challenge of reining in inflation, the bets over such steps weakened lately.

CME FedWatch tool revealed that there is 95.2% chance of the rates remaining same in December (at the time of writing) and 91.2% chance that the Fed will again stay put in late-January. The news of jobs data helped push the average 30-year fixed mortgage rate below 7.4% on Nov 3, 2023 – its lowest level in two months, boosting the housing stocks.

Cheaper valuation & Solid Return Potential

Homebuilding ETFs like iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) have a Zacks Rank #3 (Hold). The fund ITB and XHB have a P/E ratio of 7.60X and 12.20X, despite surging 32% and 27%, respectively this year.

The sector cheap and offers solid return potential. The forward P/E ratio of the sector is 7.95X versus 17.21X possessed by the S&P 500. The homebuilding sector has the price/book ratio of 1.11X versus the S&P 500’s 4.35X. Return-on-Equity and Return-on-Assets stand at 18.71X and 10.87X, respectively versus 17.54X and 6.90X ratios offered by the S&P 500.

Bottom Line

The housing market is still undersupplied, especially in the entry-level and affordable segments, where many homebuilders are focusing their efforts. This means that there is still strong demand for new homes, especially from first-time buyers and millennials. Plus, the likely fall in mortgage rates amid a less-hawkish Fed would boost the buying activities even more.

Agreed, high home prices are still a concern. But investors should not forget that demand resumed after the initial surge in mortgage rates, as buyers became used to a new normal higher interest rate environment.

Published in