The recovering U.S. housing market got some more good news last week: existing-home sales hit a decade high in March. Consumers’ appetite for home buying comes despite home prices continuing to tick higher, hitting a 31-month high in January. It all points to a real estate market that’s healthier than at any point since the Great Recession. And it’s why two key housing ETFs have been on a tear of late.
The SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction (ITB) are traditional Wall Street proxies for the health of the U.S. housing market. Their holdings include some of the market’s biggest housing stocks: D.R. Horton (DHI), Toll Brothers (TOL), Home Depot (HD), Lowe’s (LOW), Williams-Sonoma (WSM), Sherwin-Williams (SHW), etc. In other words, the stocks in these two housing ETFs cover virtually every aspect of the housing market, from homebuilders to home improvement retailers.
And right now, housing stocks are thriving. It’s why the ITB is up more than 16% year to date, and the XHB is up more than 10%. Going back even further, the ITB has advanced 27% since the U.S. election, while the XHB has jumped more than 20%.
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Few sectors are hotter than housing right now. And data like existing-home sales growing at their fastest rate since February 2007 only add fuel to the fire. Should we expect the rally in housing stocks to continue? If you go by the charts, yes. Neither housing ETF has traded below its 25- or 50-day moving average in over two months.
Despite the rally, housing stocks aren’t overly expensive either. PulteGroup (PHM) trades at a mere eight times forward earnings estimates, TOL, DHI and KB Home (KBH) at 10 times earnings estimates, WSM 14 times, LOW 15 times. By that measure, many prominent housing companies still have undervalued stocks.
Then there’s the increasingly encouraging housing data. Here’s a long-term chart of existing home sales, courtesy of the National Association of Realtors:
While there have been a couple dips along the way, home sales have basically been on steady rise since 2010.
Now look at this 10-year chart of U.S. housing starts, created by Trading Economics:
Lastly, here’s one on home prices:
In essence, everything is trending in the right direction for the U.S. housing market, and has been for a while. But if we learned anything from the subprime mortgage crisis, the real estate market can turn sour quickly. If home prices continue to rise at this pace and the economy stagnates, that’s definitely a possibility. But that’s more of a long-term concern.
In the short-to-intermediate term, housing stocks look like good momentum buys. Buying one of the aforementioned housing ETFs is one way to play it. Or you pick out a couple housing stocks that are performing even better than the ITB and XHB.
Our analysts like a few of them in particular—Home Depot, for example, is one of Chloe Lutts Jensen’s top recommendations in Cabot Dividend Investor advisory. It’s up 19% since she added it to the portfolio in October 2015. Crista Huff, editor of Cabot Undervalued Stocks Advisor, recommends PulteGroup; it’s up 11% since February.
To join Cabot Dividend Investor, click here. To join Cabot Undervalued Stocks Advisor, click here.
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