How to Profit from the New Housing Boom

10/31/2017 1:01 pm EST

Focus: STOCKS

Mike Larson

Editor, High Yield Investing

Two stock picks and three ETFs. The fundamentals look better, and we aren’t seeing any of the ridiculously stupid lending in the mid-2000s. That’s why you may want to consider building wealth with building sector plays, writes Mike Larson, senior analyst at Weiss Ratings.

My wife and I are in the process of selling our home. The packing is a hassle, and we’ll be living out of boxes for a while. But with one kid about to start college, we just don’t need as much space anymore.

Plus, to be frank, we’ve racked up some nice profits. That’s because we signed our new construction contract near the bottom of the market five-and-a-half-ago, and sales and pricing have picked up substantially since then.

It’s not just a local thing here in Palm Beach County, Florida, either. Take a look at this chart of the year-over-year change in the S&P/Case-Shiller National Home Price Index.

chart

You can see that prices were surging at an annual rate of as much as 14.5% at the peak of the bubble in 2005. That rate of change collapsed to negative-12.7% at the depths of the bust in 2009. But we flipped back into YOY appreciation territory starting in early-2012, and we haven’t looked back since.

With industry conditions improving, sector players are starting to get active on the M&A front again, too. Leading home builder Lennar (LEN, Rated “B”) just announced plans Monday to buy CalAtlantic Group (CAA, Rated “C+”) for $5.7 billion in cash and stock. The move will create the largest U.S. home builder. CAA itself was the product of a 2015 merger between the former Standard Pacific Homes and Ryland Group.


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All of these factors are combining to propel housing and construction stocks much higher! I created the table below using the tools available at the Weiss Ratings website. It shows all the major ETFs that track the industry, including both leveraged and unleveraged varieties. I’ve included data on their Weiss Ratings, recent prices, year-to-date returns, total assets, and dividend yields.

chartData Date: 10/31/17

The Direxion Daily Homebuilders & Supplies Bull 3X Shares, (NAIL) the catchy ticker symbol, is up a whopping 173% year-to-date. It’s designed to rise 3% for every 1% rise in the value of the Dow Jones U.S. Select Home Construction Index.

But even if you prefer your ETFs with a little less financial horsepower (and risk), you can see the gains are fairly substantial.

The iShares U.S. Home Construction ETF (ITB, Rated “B+”) is up more than 43% so far in 2017, while the SPDR S&P Homebuilders ETF (XHB, Rated “B”) has gained 22%.

What about the future? Well, rising interest rates are a potential headwind for the sector. But they’re only climbing gradually, rather than rocketing higher. The economy is also perking up right alongside rates. Consumer confidence just hit its highest level in 17 years, while employment and wages are headed in the right direction.

So unlike in 2004-2006, when I shouted from the rooftops that a massive housing market crash was coming, I’m much more sanguine these days. The fundamentals look better, and we aren’t seeing any of the ridiculously stupid lending we saw in the mid-2000s. That’s why you may want to consider building wealth with building sector plays.

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