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Investing in Housing Stocks

Updated: March 30, 2021, 6:26 p.m.

A house is the most expensive thing most of us will ever buy, and that's reflected in housing's outsized influence on the performance of the U.S. economy. Housing contributes an estimated 15% to the U.S. gross domestic product, representing $5 billion 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. Real estate investment trusts, or REITS, in particular are tax-incentivized 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 these three long-term trends that should enable the industry to continue to grow for years to come:

  1. Low mortgage rates: Mortgage interest rates have increased above their record lows, but by historical standards, they are still near rock bottom. Low interest rates encourage prospective homebuyers to enter the housing market and allow them to pay higher prices for their homes.
  2. Rising home ownership demand: Some millennials have entered adulthood unwilling, or unable, to become homeowners, but as this generation ages, household formation is on the rise, along with the demand for home ownership. Any federal government support to reduce the burden of student loans should further push housing demand by making it easier for younger buyers to afford their own homes.
  3. Rising time spent at home: The pandemic has dramatically increased how much time most of us spend at home, and many employees are likely to continue working at least partially from home after the pandemic subsides. With more time spent at home, the demand for home ownership post-pandemic is likely to increase. Household savings rates have skyrocketed, providing more money to spend on housing costs.

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) is a U.S. builder of premium homes, with a mix of new-entry, move-up, and luxury homes in its portfolio. NVR over the years has proven itself a disciplined risk manager, resisting the urge in good times to take on massive amounts of debt to buy property only to end up saddled with too much debt during industry downturns. NVR is also in the mortgage business, with some fees from originations comprising as much as 20% of the company's net income.
  2. LGI Homes (NASDAQ: LGIH) 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 what is traditionally the most price-sensitive segment of the housing market. LGI Homes is well positioned to continue to rapidly grow well into the future.
  3. CareTrust (NASDAQ: CTRE) is one of a number of REITs that specialize in a particular segment of the real estate market. Some REITs are focused on apartments, while others invest in shopping centers or medical facilities. CareTrust invests in senior housing and care facilities, and its current portfolio has about 300 facilities. The company is an attractive investment in part because of demographic trends -- over the next 25 years, the aging baby boomer generation will cause the nation's elderly population to balloon, creating significantly increased demand for senior living facilities.
  4. Home Depot (NYSE: HD) is the housing stock to own if you want portfolio exposure to consumer spending habits after home purchases are complete. The company has enjoyed strong sales during the pandemic as Americans confined to their homes have been making more improvements around the house. With the demand for homes outpacing supply, which generally causes home prices to rise, expect more people to remain in their current houses and renovate instead of moving. This trend, which is good for contractors, also clearly benefits Home Depot. The company is also bringing 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. Redfin (NASDAQ: RDFN) is attempting to disrupt the traditional homebuying process by charging lower sales commissions and using technology to make the buying process easier and more cost-effective. Redfin has several direct competitors, but the company distinguishes itself by offering both a broad range of home purchase and rental options and providing ancillary services such as mortgage origination. The national real estate market is highly fragmented, with the top 10 brokerages combined accounting for less than 50% of it. Newcomers such as Redfin are poised to grow rapidly without having to steal significant market share from the industry's incumbents.

Top housing sector ETFs

Investors interested in the housing sector but not comfortable with choosing individual stocks can consider any of a large number of housing-related exchange-traded funds, or ETFs. The top housing ETF is the SPDR S&P Homebuilders ETF (NYSEMKT: XHB), but be aware that the fund takes a broad view of homebuilding. Its largest holding is the stock of Johnson Controls International (NYSE: JCI), a maker of HVAC systems, and its second-largest investment is the stock of home furnishings retailer Williams-Sonoma (NYSE: WSM).

Comparatively specialized funds include the Long-Term Care ETF (NYSEMKT: OLD), which is focused on senior living, and the iShares Residential Multisector Real Estate ETF (NYSEMKT: REZ), which owns stocks of a range of U.S. residential, healthcare, and self-storage real estate companies.

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