Housing Starts are Booming: Which Housing Stocks to Buy?

Good news is always welcome, and the Census Bureau’s report that October housing starts enjoyed the biggest increase in nine years is definitely good news—especially for housing stocks. Housing starts increased by 25.5% last month, which represents a seasonally adjusted annual rate of 1.32 million new starts.

Housing starts are economically sensitive, and the excellent pace of new construction—strongest in single-family homes—is a product of several positive developments. Lower unemployment—it was announced on Thursday that the number of applications for unemployment benefits was at its lowest level since 1973— and increases in real income are allowing increasing numbers of millennials to move out of their parents’ houses and form new families.

There was also a nice increase in new construction starts in multifamily units, which rebounded after an exceptionally slow pace in September.

The good housing starts news may also have played a small role in Federal Reserve Chair Janet Yellen’s optimistic remarks to Congress on Thursday. Yellen told Congress that the improving health of the U.S. economy was strengthening the case for a Fed rate hike in December.

Earlier this year, a rate increase by the Fed was regarded by the market as a threat, a possible damper on the fragile recovery. Along with the Brexit vote in Great Britain, the U.S. presidential election, terrorist attacks in Paris and a persistent lag in hiring, the Fed was among the factors keeping investor tension at a high level.

It now appears virtually certain that the Fed will announce a quarter-point interest-rate increase in December. And the market seems to accept that.

The increase in housing starts is reflected nicely in some Exchange Traded Funds (ETFs) that track homebuilding activity. Here’s a chart of SPDR S&P Homebuilders ETF (XHB) showing the volatile state of housing stocks heading into the election and the rally since. XHB started to rise a few days before the election, but got a high-volume burst of energy on November 9, the day after results were known.

XHB

You can also see increasing investor interest in housing stocks in the charts of Lennar (LEN) and Pulte Homes (PHM). There is still a lot of overhead in housing stocks, as they went through a steep decline in September and October, but if this positive trend on housing starts continues, they will represent a good place to look for growth opportunities.

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