Homebuilder Sentiment Hits a Decade-Plus Low

Investing isn't hard. You just have to avoid mistakes.

Well, there's a problem with that... Our brains are wired to make every investing mistake in the book.

We want to stick with the crowd instead of standing out. And once we hear a compelling story, it becomes nearly impossible to change our minds, regardless of new information.

Those were useful ways to stay alive long ago. But they can be deadly today – and the investing world is no exception.

Investors are making those exact mistakes right now. They're pulling money out of homebuilder stocks en masse. They think it's the right move based on one compelling story... But that story is dead wrong.

Here are the details...

"The housing market as we know it is dead. And anything associated with it is dead too."

That's the prevailing narrative. Folks have good reason to believe this story...

Mortgage rates skyrocketed last year. They more than doubled. Combine that with the rapid rise in home prices we saw in 2020 and 2021, and affordability has crashed.

The housing market has slowed to a crawl as a result. Mortgage originations fell more than 50% from the third quarter of 2021 to the same period in 2022. And existing-home sales have dropped by more than a third over the past year.

Investors are seeing this grim picture. They're running from just about anything related to housing... especially homebuilder stocks.

We can see this in the shares outstanding for one of the largest homebuilder exchange-traded funds: the iShares U.S. Home Construction Fund (ITB).

This fund can create and liquidate shares based on investor demand. So a falling number of shares outstanding means that folks want nothing to do with homebuilder stocks.

That's exactly what's happening today. ITB's shares outstanding have dropped to a nearly 14-year low. Take a look...

ITB's shares outstanding crashed last year as the housing market ground to a halt. And they have tumbled to even lower lows to begin 2023.

The "death of housing" narrative is driving this extreme bearishness. But that story is wrong.

Yes, the housing market has had a massive slowdown. However, the crash can't continue for long due to one simple fact...

Homebuilders underbuilt for the entirety of the last decade. As a result, America is millions of housing units short of what it needs.

That means we have a secular trend that's hugely in favor of homebuilders. We still need what these companies are selling... And we need a lot of it.

Investors are missing this key idea, though. They're too focused on short-term problems. So they're fleeing the sector in droves.

Meanwhile, ITB is rising. Shares are up more than 11% this year. The trend is in our favor.

It's a big mistake to write off this sector for good. And owning ITB is a great way to position yourself to profit. So if you haven't already, ignore the popular narrative... Instead, listen for this quietly unfolding growth story in housing.

Good investing,

Brett Eversole

Further Reading

"Those who assume this boom must precipitate a bust are still fighting the last war," Brett says. Housing is in a slowdown. But for one important reason, we won't see a repeat of 2008... Learn more here.

"The slowdown in housing has reached a rare level," Brett explains. One leading indicator for the sector plunged recently. And based on history, it could mean a housing market turnaround is closer than you think... Get the full story here.