Housing-Related Stocks Look To Be On Solid Ground

Housing-Related Stocks Look To Be On Solid Ground
Paul Allison, CFA

about 1 year ago2 mins

Mentioned in story

Housing data has been sorely lacking in curb appeal this year: after a relatively steady 12-year recovery, housing starts have recently dropped into a sinkhole (blue line). The SPDR S&P Homebuilder ETF, on the other hand, is a different story: it’s up 14% this year.

That disconnect does make some sense: homebuilders are seen as early ways to invest in a directional change in interest rates (and, ultimately, mortgage rates). So, as inflation started to cool, homebuilder shares began rallying in anticipation that interest rates might hit a plateau or even turn lower, because of a weakening economy. But the narrative’s flipped on its head recently, with a string of strong economic data suggesting that, actually, more rate hikes could be on the way.

Thing is: homebuilders and other housing-related investments might still hold up, no matter what the outcome. See, on the one hand, you could expect lower interest rates (and lower mortgage rates) to give a boost to the housing market – and to builders and other housing-exposed firms.

On the other hand, while higher-for-longer interest rates could hamper mortgage demand (and therefore new home sales) in the near term, it’s likely only to delay the demand, and not quash it altogether. After all, housing formation – the creation of groups of people living together – continues to outpace the number of homes actually being built, which probably means underlying demand for housing is there, just bubbling under the surface. And the longer the economy stays strong, the more likely it is that the pent-up demand gets unleashed.

So what’s the opportunity, then?

You could invest in the shares of homebuilding firms or the SPDR S&P Homebuilder ETF (ticker: XHB, expense ratio: 0.35%), but the stock prices of those firms are volatile, and you might find yourself being sucked into predicting short-term interest rate moves. Alternatively, home retailer firms like Home Depot or Lowe’s offer exposure to long-term housing market strength without the direct link to mortgage rates and new home construction. After all, there are plenty of factors that influence our decisions to renovate, repair or replace – beyond mortgage rates.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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