What makes housing stocks cyclical?

Housing stocks are considered "cyclical" because they tend to rise and fall with the broader economic cycle. When the economy is strong, interest rates are favorable, and consumer confidence is high, demand for homes typically increases. Conversely, during economic downturns or when interest rates rise sharply, housing activity often slows. This means housing stocks can be more volatile than some other sectors, but they also offer potential for strong growth during economic expansions.

What is the housing shortage, and why does it matter?

The housing shortage refers to the gap between housing supply and demand in the United States. Current estimates suggest America needs several million additional homes to meet demand. This shortage has developed over years of underbuilding following the 2008 financial crisis, combined with population growth and changing demographics. For investors, this shortage creates a long-term tailwind for companies that build new homes or supply materials for construction and renovation, potentially supporting demand even during economic slowdowns.

How do interest rates affect homebuilding stocks?

Interest rates have a significant impact on homebuilding stocks because they directly affect mortgage rates and housing affordability. When interest rates rise, mortgages become more expensive, which can reduce demand for new homes and put pressure on homebuilder stocks. Conversely, when rates fall or stabilize at lower levels, affordability improves, often boosting home sales and homebuilder stock performance. This is why housing stocks often react strongly to Federal Reserve announcements about interest rate policy.

What's the difference between a homebuilder and a housing supplier?

Homebuilders (like DHI and LEN) are companies that develop land and construct houses, selling directly to homebuyers. Housing suppliers (like BLDR and GMS) manufacture or distribute the materials that go into building homes, such as lumber, wallboard, roofing, or flooring. They sell to homebuilders, contractors, and sometimes directly to consumers. While both types of companies are tied to housing market activity, suppliers may have more diversified revenue streams as they often serve both new construction and renovation markets.

What are manufactured or factory-built homes?

Manufactured or factory-built homes are houses that are constructed almost entirely in a factory setting before being transported to their final location. Companies like SKY and CVCO specialize in this housing segment. These homes are typically more affordable than traditional site-built homes, making them an important part of addressing housing affordability challenges. They're built to federal construction standards, are often energy-efficient, and can be produced more quickly than conventional homes. As housing costs rise, manufactured housing represents a growing segment of the residential market.

15 handpicked stocks

Dream Home Economy

Want to own a piece of the American Dream? This collection features companies that build homes, supply materials, and provide essential services across the entire homeownership lifecycle. These carefully selected stocks represent the backbone of where Americans live.

Han Tan | Market Analyst

Updated 2 days ago | Published at juin 17