A house is the most expensive thing most of us will ever buy, and that's reflected in housing's outsized influence on the U.S. economy. Housing contributes an estimated 15% to the U.S. gross domestic product (GDP), or about $3 trillion in annual spending.
Housing-related spending takes many different forms, from paying rent to buying a home to paying for upkeep and renovations. As a result, there are many different types of housing stocks to consider adding to your portfolio. Many are cyclical, and some are ideal for income-focused investors. For example, real estate investment trusts (REITs) are particularly incentivized by tax laws to pay high dividends.
The bull case for the housing market
Why would you want to add housing-related stocks to your investment portfolio? Consider three long-term trends that should enable the industry to continue to grow for years to come:
- Slowly falling mortgage rates: Mortgage interest rates are up big from record lows, but they are still below historical standards. Lower rates encourage prospective homebuyers to enter the housing market and allow them to pay higher prices for their homes.
- Rising homeownership demand: Some millennials have entered adulthood unwilling or unable to become homeowners. As this generation ages, however, family creation will be on the rise, along with the demand for home ownership. Any federal government support to reduce the burden of student loans should increase housing demand by making it easier for younger buyers to afford their own homes.
- Rising time spent at home: We're getting out more than we did during the lockdowns of the COVID-19 pandemic, but the last few years have perhaps forever altered work-life balance and put more emphasis on the comforts of home. Many employees continue to work at least partially from home. With more time spent at home, the demand for home ownership is likely to increase.
Will inflation sink housing?
As noted above, conventional wisdom states that when interest rates rise, home prices suffer. Inflation jumped in 2024 and continues to be a concern, which has put pressure on homebuilder stocks.
We've seen higher rates slow housing sales, but there is still plenty of long-term upside. On a historical basis, the nation has a massive undersupply of housing stock. It's going to take years of building just to match the new millennial household formation and demand.
The best homebuilding and housing stocks
This is a broad category, and there are many competitors in each subsector. Here are a few standout companies in the housing sector whose stocks would make fine additions to an investment portfolio.
1. NVR
NYSE: NVR
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NASDAQ: LGIH
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LGI Homes (LGIH +0.30%) is focused on building entry-level homes, and the company has been one of the fastest-growing in the industry because of its ability to capitalize on millennials' burgeoning demand for home ownership.
The company is laser-focused on costs, doing its best to ensure the monthly cost of owning one of its homes is within range of the region's prevailing rental prices. LGI's scale is sufficiently large to enable the company to compete on price in traditionally the most price-sensitive segment of the housing market. LGI Homes is well positioned to continue growing rapidly.
3. CareTrust
NYSE: HD
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Home Depot (HD +0.46%) is the housing stock to own if you want portfolio exposure to consumer spending habits after home purchases are complete. The company enjoyed strong sales during the lockdown phase of the pandemic as people confined to their homes made more improvements around the house, and current high home prices will likely cause more people to remain in their current houses and renovate instead of moving. The trend, which is good for contractors, also clearly benefits Home Depot.
The company has also brought the industrial distributor and one-time affiliate HD Supply back in-house, which gives Home Depot even more exposure to homebuilders and construction customers.
5. Rocket Cos.
NYSE: RKT
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Are housing stocks right for you?
Homebuilders don’t have the mega-growth potential of tech stocks, but given the urgent need for housing in the U.S., the industry is set up well to deliver for investors over the long term. Many of these companies also have predictable cash flows and return money to investors, making them solid income stocks.
Portfolios, like homes, need strong foundations. Housing stocks can provide the bedrock every investor needs.
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