High mortgage rates and slow demand have been putting a lid on a homebuilder rebound the past year, but there are early signs of a rally. Under the pressure of public calls to ease monetary policy, a capitulating Fed could give the industry a push, which opens trading possibilities in a couple of leveraged ETFs.
In its most recent reading, the National Association of Home Builders (NAHB) noted that confidence plateaued in August, following a larger trend of 16 consecutive months in negative territory. Due to the challenges, its head economist called for lower rates.
“Housing affordability is central to the outlook for economic growth and inflation,” said NAHB Chief Economist Robert Dietz. “Given a slowing housing market and other recent economic data, the Fed’s monetary policy committee should return to lowering the federal funds rate, which will reduce financing costs for housing construction and indirectly help mortgage interest rates.”
Nonetheless, as VettaFi head of sector and industry research Roxanna Islam noted, there is some proverbial light at the end of the tunnel. Mortgage rates are starting to tick lower, single-family housing stats are edging higher as well, while investing icon Warren Buffett placed bets on a couple of homebuilders: DR Horton and Lennar Corp.
Home builders enjoyed a post-pandemic rally, but it started to fizzle ahead of the 2024 presidential election, as seen in the S&P Homebuilders Select Industry Index, along with the aforementioned DR Horton and Lennar. All three trended lower for much of this year, but have been rallying strongly since April’s Liberation Day sell-off.
2 Trading Options
If traders think the bullishness in home builders can continue, they can capitalize on their strong convictions with the Direxion’s Daily Homebuilders & Supplies Bull 3X Shares (NAIL). It offers 3x exposure to the daily performance of the Dow Jones U.S. Select Home Construction Index. It’s a prime representative of the industry, focusing on home construction and producers, sellers and suppliers of building materials, furnishings and fixtures and also home improvement retailers. For added diversification, it includes large-, mid- or small-cap companies.
Traders might also want to look at a correlating play on the broader real estate market with the Direxion Daily Real Estate Bull 3X Shares (DRN). Like NAIL, it offers 3x exposure, but to the Real Estate Select Sector Index. Its constituents include companies involved in real estate management, real estate development, and real estate investment trusts (REITs), excluding mortgage REITs.
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