It's no secret that the housing market is struggling. Home sales plunged after the pandemic moderated as mortgage rates soared while home prices remained elevated, essentially freezing out prospective homebuyers.
As the chart below shows, existing home sales are still well below where they were even before the pandemic started.
US Existing Home Sales data by YCharts
As you can see, home sales are down by about 40% from before the pandemic, meaning there's a lot of room for recovery as conditions improve, and that's already starting to happen.
The Federal Reserve just cut interest rates by 50 basis points, lowering them for the first time in four years, and kicking off another rate-cutting cycle. The central bank expects to cut the Fed Funds rate by another 50 basis points by the end of the year, and a full percentage point next year.
Mortgage rates have already started falling, though they've rebounded in the last few weeks, but they should continue to fall over the next year. There's a national housing shortage of more than 4.5 million homes, according to Zillow, and the high cost of housing has become a central issue in the presidential race. Considering the abnormally low level of housing, falling mortgage rates, and the political movement to solve the current housing shortage, the housing sector seems well positioned for a rebound.
Image source: Getty Images.
Get to know this housing ETF
One way to capitalize on a broad market trend is by buying an exchange-traded fund (ETF), and one that looks like a smart buy for the housing recovery is the SPDR S&P Homebuilders ETF (XHB -1.21%). The index fund tracks the S&P Homebuilders Select Industry Index, which is the homebuilders segment of the S&P Total Market Index. The ETF trades for just $122 a share currently, so you can get some exposure to it for less than $200.
The homebuilders ETF carries a wide range of housing-related stocks. Among the top 10 holdings are A.O. Smith, Home Depot, Builders First Source, and Owens Corning, each of which make up about 3.5% of the ETF's value.
Several of those stocks have been top performers over their history. Home Depot is up more than 2,000,000% since its 1981 initial public offering (IPO) and has nearly doubled the S&P 500's return over the last decade. Builders FirstSource, a supplier and distributor of building materials, has risen more than 3,500% over the last decade, and Owens Corning has jumped 500% over the last 10 years.
Additionally, for a sector that looks poised for strong growth in the housing recovery, the SPDR S&P Homebuilders ETF trades at a surprisingly cheap valuation, with a price-to-earnings ratio of just 16. The S&P 500's valuation is 29, meaning the broad market index is nearly twice as expensive the homebuilder ETF.
Given the high valuations of AI stocks and tech stocks, rotating out of those names and into home improvement stocks and homebuilders like those represented by the Homebuilders ETF.
Why it's a buy
Even with its low valuation, the SPDR S&P Homebuilders ETF has outperformed the S&P 500 recently, is up 28% this year, and it's nearly tripled over the last five years.
Existing home sales should return to their historical levels over the coming years, meaning an increase of 1.5 million homes being sold and the work that comes with it, and Vice President Kamala Harris aims to expand the housing supply by 3 million if elected.
Existing homeowners also have record levels of home equity built up that they're ready to spend, especially as interest rates come down, which should support spending on renovations and home improvement projects.
As the housing market reawakens, the SPDR S&P Homebuilder ETF looks poised to soar. Investors should take advantage of the great price while they can.