American homebuyers are driving a bull market in housing. Here’s how to play it
There’s a bull market going on in U.S. home construction companies right now, and it’s making investors a lot of money.
For context, ITB is the iShares U.S. Home Construction ETF. It holds construction heavyweights including D.R. Horton, Lennar, and Pulte.
Below, look what it’s done so far in 2020.
If we pull out to the 12-month chart, you can see ITB soaring 52% — that’s double the S&P’s performance.
And keep in mind — this 52% is from an ETF! In other words, a broad basket of stocks. For a sector ETF to post this size gain is indicative of massive strength.
***Yesterday, investors received more bullish news on U.S. construction
We learned that U.S. existing home sales rose 3.6% in December, fueled by low mortgage rates and historically-low unemployment.
On a year-over-year basis, existing home sales were up 10.8% from December 2018.
Helping drive demand has been favorable borrowing conditions for homebuyers. According to Freddie Mac, as of one week ago today, the average interest rate on a 30-year fixed mortgage came in at 3.65%.
Below, you can see how that compares to the 30-year fixed rate over the last five years. Though rates are up slightly from September, they’re still quite low relative to their 5-year range.
Given that the Fed is likely on “pause” for 2020 in terms of rate hikes, it’s probable we’ll see rates remain in attractive ranges for homebuyers.
“But wait!” you say. “You’re telling me about existing home sales. But a bull market in construction companies implies new home construction.”
Right you are.
***A housing shortage is driving the bull market in home construction stocks
We are facing this dire housing shortage. We need to build more.
That comes from Lawrence Yun, chief economist of the National Association of Realtors (NAR).
Given the current sales pace, as of the end of December, there was a 3-month supply of homes on the market. That’s the lowest in NAR records in two decades.
This shortage of housing is driving up prices — the median sales price for an existing home in December was up 7.8% on the year, to $274,500.
Demand for homes has been even more pronounced on the less-expensive end of the market. Inventory for homes priced less than $100,000 fell 14.3% in December, based on the year prior.
So, what’s the impact of this demand?
Well, as you recall from Econ 101, it’s attracting more supply. This past December, the construction of new U.S. homes rose to its highest level since 2016, according to the Commerce Department.
This puts builders in a sweet spot today … home prices aren’t so high that they’re pricing consumers out of the market … mortgage rates are attractive, luring in new buyers … and there’s record-low housing inventory, leading to heavy demand for new homes.
Put all of that together, and it’s easy to see why home construction stocks are soaring.
***If housing has already climbed this much, have I missed it? Am I too late to get it?
Not if we go by demographics.
For more on that, let’s turn to Matt McCall, editor of Investment Opportunities. Regular Digest readers know Matt as a thematic investment expert — basically, he tracks the huge “themes” or trends that are reshaping our world, and finds the best ways to invest in them.
While themes such as artificial intelligence, driverless cars, and legalized marijuana get the spotlight, the rise of the U.S. housing market stands to be incredibly profitable in its own right.
Now, as to why this housing boom has long legs, there’s one simple answer — millennials.
From Matt:
Millennials are now the largest living adult generation. What’s more, they are at a similar point to the boomers after World War II as they begin to form families and buy houses.
They may have waited longer than their forerunners, but they will have a huge impact as they dominate the economy for the next decade or more. It’s time to get in position to make our money.
In Matt’s issue on this housing opportunity, he then walks readers through the rise of millennials, as they’re finally coming into their own professionally and financially, noting the impact on housing demand.
But then Matt pivots, touching on something we’ve addressed earlier in this Digest — housing inventory. As we noted, in December, supply hit a two-decade low.
Keep that in mind as you read the below from Matt — which was written back in September:
Inventory, or the number of homes for sale, has been on the downswing for years (see the blue line on the chart below). A recent rollover on the chart suggests the amount of homes on the market will continue to fall.
At the same time, the number of U.S. housing starts (the orange line) has increased for the last decade. The inverse relationship makes sense. As the number of homes for sale falls, homebuilders are incented to build new homes.
The result is higher revenue for homebuilders, leading to higher stock prices. This is precisely why housing stocks recently broke out to their best level in over a year.
Matt then touches on the decline in mortgage rates, summarizing with this:
Here’s the takeaway for us: Over the last 10 years, when mortgage rates fall to this level and home inventories turn lower, investors make money in housing stocks.
Since Matt’s call, ITB has climbed more than 17%.
***So, how can you play this?
The easy way is through a one-click ETF, such as ITB or XHB, which is the SPDR S&P Homebuilders ETF. It rose 41% over the last 12 months.
You can also look at the individual home construction companies. Three mentioned earlier are D.R. Horton, Lennar, and Pulte. Below, you can see their 12-month performance. Pulte leads the pack, up 65%.
Matt’s pick is a less-obvious homebuilder with exposure to 21 key U.S. markets spanning eight states.
Here’s his summary:
I see strong potential here worth grabbing. If my expectations for millennials and the housing sector are correct, the stock could return us a strong 85% within the next 24 months.
To sign up for Investment Opportunities and get Matt’s pick, click here.
***There’s another interesting way you could play the housing boom — through superior mortgage lenders
Famed investor, Louis Navellier, recently added one to his Accelerated Profits portfolio. It also happens to be his choice for InvestorPlace’s Best Stocks for 2020 contest — PennyMac Financial (PFSI).
Here’s Louis:
PennyMac Financial Services (NYSE:PFSI) is certainly one of my favorite picks for the coming year.
Why? Because it is perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing …
… the Federal Reserve has spent the whole year reverting to a very accommodative monetary policy. Low interest rates are here to stay and banks are lending.
This all bodes well for both the housing industry and home buyers. Even renters that are looking to upgrade will benefit from lower construction costs, since more availability means more price competition …
Another strength that PFSI has is that it not only benefits from new home sales, which are on the rise, but also existing home sales, which are also gaining momentum again.
***Last quarter, PFSI posted blowout earnings numbers
It achieved earnings of $121.5 million, or $1.51 per share, and revenue of $436.3 million. Analysts were expecting earnings of $1.31 per share and revenue of $381 million, so PFSI posted a 15.3% earnings surprise and a 14.5% sales surprise.
The result? A 15% pop over the next couple weeks, as you can see below.
PFSI will report earnings on February 6. We’ll be watching to see how the new numbers come in.
For more on PFSI from Louis, click here. As we wrap up, U.S. housing is booming, and there are lots of ways to play it.
Whichever you pick, place your chips today, as there are more gains to come.
Have a good evening,
Jeff Remsburg
