The housing sector appears poised for a recovery.
It’s no secret that the housing market is struggling. After the pandemic subsided, home sales plummeted as home prices remained high and mortgage rates soared, effectively freezing the number of potential homebuyers.
As the chart below shows, existing home sales remain well below pre-pandemic levels.
US existing home sales data from YCharts
As you can see, home sales are down about 40% compared to pre-pandemic levels. This means there is plenty of room for recovery once the situation improves, and that is already starting to happen.
The Fed just cut interest rates by 50 basis points, marking the first rate cut in four years and starting a new rate-cutting cycle. The central bank expects to cut the federal funds rate by another 50 basis points by the end of the year, and then cut it entirely next year.
Mortgage rates have already started to fall, rebounding in recent weeks, and should fall further into next year. According to Zillow, there is a housing shortage of more than 4.5 million units nationwide, making high home prices a central issue in the presidential election. Given the extraordinarily low housing standards, falling mortgage rates, and political moves to solve the current housing shortage, the housing sector appears well-positioned for recovery.
Image source: Getty Images.
Learn about this housing ETF
One way to take advantage of broader market trends is to buy exchange-traded funds (ETFs), and one that looks like a smart buy for the housing recovery is the SPDR S&P Home Builders ETF (XHB 0.81%). This index fund tracks the S&P Homebuilders Select Industry Index, the homebuilding division of the S&P Total Market Index. This ETF is currently trading at just $122 per share, so you can get some exposure for less than $200.
The Home Builders ETF includes a wide range of housing-related stocks. The top 10 stocks include AO Smith, Home Depot, Builders First Source, and Owens Corning, each accounting for about 3.5% of the ETF’s value.
Some of these stocks are among the top performers in history. Home Depot has risen more than 2 million percent since its 1981 initial public offering, nearly doubling the S&P 500’s returns over the past decade. Builders FirstSource, which supplies and sells building materials, is up more than 3,500% over the past 10 years, and Owens Corning is up 500% over the past 10 years.
Furthermore, for a sector poised for strong growth in the housing recovery, the SPDR S&P Home Builders ETF trades at a surprisingly cheap valuation of just 16 times earnings. At a valuation of 29 for the S&P 500, the market index is nearly twice as expensive as the Home Construction ETF.
Given the high valuations of artificial intelligence (AI) and tech stocks, a rotation away from these stocks and into home improvement and home construction stocks like the Home Builders ETF seems like a good bet.
Why buy?
The SPDR S&P Home Builders ETF has recently outperformed the S&P 500 despite its lower valuation. It’s up 28% this year and has nearly tripled over the past five years.
Existing home sales should return to historical levels over the next few years, meaning 1.5 million more homes to be sold and the labor involved, and Vice President Kamala Harris, if elected, will The aim is to expand the number of units by 3 million units.
Existing homeowners have also accumulated record levels of home equity ready to spend, especially as interest rates fall, which should help them spend on renovations and home improvement projects.
The SPDR S&P Homebuilder ETF looks poised to soar as the housing market reinvigorates. Investors should take advantage of the best prices possible.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has a position in and recommends Home Depot. The Motley Fool recommends AO Smith and Owens Corning. The Motley Fool has a disclosure policy.
