Construction Sector Booming ... But Will the Gains Hold?

My wife Kim and I are in the process of selling our home. With our oldest son about to start college, we just don’t need as much space anymore.

But to be frank, there’s another reason at work. My specialty over my years at the Weiss organization has been analyzing the interest rate and real estate markets, as well as the mortgage and banking industries. I saw the housing collapse coming from a mile away in the mid-2000s, and told my readers and subscribers to get the heck out of the way. Those calls worked out great.

But beginning in 2011 and 2012, I saw signs the market was stabilizing again – and my research told me an upturn would be next. For that reason, and family reasons as well, we signed a new construction contract in early 2012. That decision has now paid off for us, and the recovery has paid off for hundreds of thousands of other homebuyers, too.

Just look at this chart of the year-over-year change in the S&P/Case-Shiller National Home Price Index …

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.

It’s not just the underlying real estate market that is doing well. Many stocks and ETFs tied directly or indirectly to the fortunes of the market are shooting the lights out, too!

Take a look at this Construction and Housing ETFs Screener that I created 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.

Data Date: 10/31/17

The Direxion Daily Homebuilders & Supplies Bull 3X Shares, with the catchy ticker symbol “NAIL”, is leading the pack, 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.

Meanwhile, industry players are starting to get active on the M&A front again now that market conditions are improving. Leading home builder Lennar (LEN, Rated “B”) just announced plans to buy CalAtlantic Group (CAA, Rated “C+”) for $5.7 billion in cash and stock this week. 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.

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 makes now a good time to check out some of the ETFs I highlighted earlier. You can also dive deeper by checking out their component stocks. Or you could just let me do all the work for you!

Consider: I just added a construction-levered materials company that pays a generous dividend in my High Yield Investing newsletter three weeks ago. The stock exploded to a 28-month high on Tuesday, handing my subscribers double-digit open gains. I’d love to have you on board and racking up those kinds of profits. If you’re interested, just click here.

Until next time,

Mike