Real estate: home to big returns despite the pandemic

Housing related stocks and ETFs have been doing surprisingly well in the last year, despite all that is going sideways. Tech might not be the only very profitable area to invest in.

Among the great performing stocks this year, we have homebuilders such as LGI Homes, Lennar and Horton who can be very proud of their 64%, 41.4% and 41% gains respectively. That’s more impressive than some well performing tech stocks! If you look at the Facebook stock, it was up only 28%. As a matter of fact, all homebuilder stocks went up this year.

The question is: how come?

 

Homebuilders leading the market

Despite high unemployment rates, lots of people still have jobs – thankfully – and are forced to work from home due the pandemic situation. If people spend more time at home, they naturally have more time to think about how they could improve their accommodation. There is a growing demand for additional space, means of communications and additional facilities to enhance comfort and convenience.

In addition to these growing “wants”, we have very low interest rates which have made  construction work and taking on a home loan more affordable. Indeed, the rate for a 30-year fixed mortgage dropped to 2.86% as of Sept, said Freddie Mac, The Federal Home Loan Mortgage Corporation.

 

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The industry is therefore multiplying existing home sales, reaching highs we have not seen since 1998. "Low mortgage rates caused homebuilder sentiment to match its 1998 high and existing-home sales jumped at a record monthly pace" according to Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.

 

Housing stocks overperforming

Now that we have settled the reason for such a thriving situation, let us examine the different ways to play it. Most housing stocks are up, such as LGI (LGIH). LGI is one of the smaller players in the field with a $2.8 billion market capitalization, but nevertheless managed to position itself as a market leader, providing homes of all styles and standing.

 

5LGI (Source: Investing.com)

 

NVR (NVR) remains one of the largest homebuilders but was up a mere 10.8% this year. It might not be as high as other stocks, but it still beats the S&P 500 return.

 

6NVR (Source: Investing.com)

 

As mentioned before, consumers are also looking to make their home more convenient and nicer to live it. RH (RH), a company selling high end furniture, is thriving as clients want to enhance their accommodations. The shares are up 80% this year and over threefold since the low in March.

 

7RH (Source: Investing.com)

 

Housing ETFs are not bad either

There is a lot of choice in terms of ETFs in the real estate industry. In his article published on investors.com, Mark Krantz recommends three ETFs for those who wish to enter the real estate trend.

The first option is the iShares U.S. Home Construction ETF (ITB). Valued at $2.2 billion, it is the largest real estate share, and is up 27% this year only. We must note that it is also not the most diversified product, with a double digit weighting for some of the biggest companies: D.R. Horton and Lennar.

 

8

iShares U.S. Home Construction ETF (Source: Investing.com)

 

As a second option, there is the SPDR S&P Homebuilders ETF (XHB). Sitting at $1.4 billion, it brings a more diversified approach as it also includes more different areas such as furnishing and home improvement retail stocks. All of the weightings are equal at 4% and the ETF is up 19.1% year-to-date.

 

9SPDR S&P Homebuilders ETF (Source: Investing.com)

 

Finally, Krantz also proposes the option to go for a smaller ETF, with the Hoya Capital Housing ETF (HOMZ), which is much broader than the two previous products, with top holdings that are Home Depot and Lowe’s. It took 3.3% this year.

 

11Hoya Capital Housing ETF (Source: Investing.com)

 

Concluding remarks

There are many ways to enter this market if you’re interested, whether you choose to enter through a specific stock or an ETF. As Bespoke Investment Group said: “Given the strength in housing numbers and the upside momentum for the homebuilder group, we think it's fine to have exposure to this area of the market as long as the uptrend remains in place.” We shall observe the market evolution in the coming months. One thing is certain, though: as sure as people will always need to eat, they will always need a roof over their head.

 

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Sources:

https://www.investors.com/etfs-and-funds/etfs/top-stocks-investors-nailing-down-big-gains-unlikely-place-housing/?src=A00220&yptr=yahoo

https://www.spglobal.com/marketintelligence/en/

https://www.investopedia.com/articles/etfs/top-real-estate-etfs/

https://etfdb.com/etfdb-category/real-estate/

 

 

Read our next article: What is Ray Dalio’s investing Strategy? And why isn’t it working?

 

 

 

 

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