In May 2020, I called out the homebuilding sector as the place to be for long-term value-minded investors.

My thesis for the sector was extremely simple:

  1. Homebuilder stock prices had been decimated by the pandemic.
  2. The long-term business prospects for these companies looked extremely bright.

The homebuilding sector has since soundly outperformed a powerful bull run by the S&P 500.

The best investment opportunities are often the simplest.

The setup on this one was easy to see…

In the decade following the collapse of the housing market in 2007, homebuilders hardly built any new homes.

We’re seeing by far the lowest rate of homebuilding relative to the population of the United States in 60 years.

The housing market has swung from one extreme to the other, as markets often do.

That new home shortage existed in May 2020… and it still exists today…

It Looks Like Another Great Homebuilding Buying Opportunity

Homebuilder share prices have had a great run since I made my call in May 2020, but this year has been unkind to the sector.

With all eyes on rising mortgage rates and the troubles of the overall stock market, the homebuilding sector has fallen hard in 2022.

The entire sector is down nearly 20%.

That’s pushing bear market territory, folks.

This decline has created another incredible buying opportunity.

The long-term fundamentals for these companies haven’t changed.

There’s still more than a decade of underbuilding that has to be made up for.

That’s going to drive strong sales volumes for homebuilders.

After all, it took more than a decade of underbuilding homes to create the current deficit.

Therefore, it’s going to take a decade of furious homebuilding to dig our way out of this housing shortage.

And yet, most homebuilding companies are currently trading at four or five times 2022 earnings.

That’s incredibly pessimistic given the opportunity in front of these businesses.

From these valuations, these stocks could double and they’d still be inexpensive.

There Are Easy, Diversified Ways to Play This

This is an easy, long-term opportunity for investors to play.

With these companies trading at four and five times earnings, the threat posed to them by rising mortgage rates is already more than priced into these stocks.

Diversified homebuilder exposure can be obtained through either the iShares U.S. Home Construction ETF (CBOE: ITB) or the SPDR S&P Homebuilders ETF (NYSE: XHB).

The iShares U.S. Home Construction ETF would be my preference.

This exchange-traded fund (ETF) is a more concentrated bet on the larger homebuilders, while the SPDR S&P Homebuilders ETF owns homebuilders alongside companies that supply materials to homebuilders.

Naturally, both ETFs will benefit from increased homebuilding.

I prefer the iShares U.S. Home Construction ETF because I like the way homebuilding companies have cleaned up their balance sheets in recent years and because their specific stocks are so cheap.

With valuations in the sector extremely low and long-term growth trends looking great, both of these ETFs should continue to outperform the overall market over the next couple of years.

— Jody Chudley

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Source: Wealthy Retirement