Last Thursday we learned that builder confidence has returned to levels not seen since 2005. The best indicator of this is the National Association of Home Builders’ Housing Market Index (HMI).
This index measures three metrics reported by home builders: current single-family home sales volume; projected single-family home sales volume for the next six months; and current buyer foot traffic.
Generally speaking, a reading above 50 is bullish for home builders, while a reading below 50 is bearish.
Last Thursday’s reading for July came in at 60, and the June reading was revised upwards from 59 to 60. This is the chart of the HMI over the last 20 years:
As you can see, it’s been a decade since we’ve seen this kind of confidence in the housing market. And stocks with exposure are moving higher.
Just look at the year-to-date performance of housing and construction related ETFs, including theiShares U.S. Home Construction Index Fund (NYSEArca: ITB), SPDR S&P Homebuilders ETF (NYSEArca: XHB) and PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB).
All three ETFs are outperforming the S&P 500 year-to-date, with gains of 8.4%, 9.5% and 12.3%, respectively, versus 3.2% for the broad market index.
Of this group my favorite is the PKB because of its greater exposure to suppliers to the construction industry. These are the companies that supply items such as fasteners, countertops, lumber, sheetrock and thermally formed concrete products.
The right supply companies are selling their products in practically every new build and renovation happening around the country. And for that simple reason they’ve been my favorite way to play the growth trend in the construction sector.
Though to be perfectly honest, my preferred strategy is to go with individual names. I’d rather forgo the diversification of an ETF to gain the more rapid growth achieved by standout companies in the space.
Just look at shares of U.S. Concrete (NASDAQ: USCR), a small-cap concrete stock that I wrote about on June 11. Since that time the stock is up 12%, powered in large part by increasing confidence in the durability of the housing recovery.
The trend in the HMI index tells a story of an industry that is doing more than just recovering. Homebuilder confidence wouldn’t reach a decade high if things were just mediocre. Builders like what they’re seeing out there. In certain regions they’re having a hard time finding good help. In other words, the housing and construction industry is returning to growth mode.
If you’re already invested, stay the course. If not, consider looking at the PKB exchange-traded fund, or individual stocks such as U.S. Concrete.
This article is brought to you courtesy of Tyler Laundon from Wyatt Investment Research.