Some of the most prolific homebuilders are working overtime to meet demand.
The rush of building is a continuation of last year's industry momentum. According to the National Association of Home Builders, "U.S. housing starts increased 11% last year, following an 8% gain in 2014. The NAHB expects housing starts to rise another 10% this year, accelerating to 18% in 2017."
The strong demand should boost the share price of building companies and related exchange traded funds (ETFs). It's a good time to invest in these companies and funds. But as is always the case, it's important to carefully evaluate the investment carefully.
Some building companies and ETFs carry more risk than others. Some have better growth strategies and management or are operating in segments or regions that are particularly promising.
Consider below a few ways to invest in U.S. homebuilders.
There are good values in a number of homebuilder stocks. That may reflect the investors' reticence to dive in. These investors remain concerned about similarities between conditions prior to 2008's subprime mortgage crisis and recession and the current real estate climate.
But the fears of a bubble and crash are unwarranted. The overall economic landscape, particularly the financial services industry, is on more solid footing. The end effect has been to create opportunity in real estate.
To wit, there has been a remarkable decline over the last year in price-to-earnings ratios for 11 major homebuilders. Most notably,CalAtlantic Group, which was just named Builder of The Year in 2016, saw its price-to-earnings ratio drop to 8.7 in March from 13.9 at the same point last year. Even KB Homes, one of the country's largest homebuilders, saw its price-to-earnings ratio drop from 15.5 in March of last year to 10.7 at the end of the first quarter in 2016. The nine remaining homebuilders saw their price-to-earnings ratios decline after fears of an impending bubble began to circulate.
These companies have great potential, particularly as individuals benefitting from a strong job market and solid economy feel confident in their ability to purchase homes. Investors may want to consider D.R. Horton (DHI) - Get Report , one of the country's largest homebuilders. The company recently announced impressive earnings and sales numbers for its 2016 second quarter.
D.R. Horton net income soared 32% to $190.1 million or .52 cents a share over the same quarter a year ago. Net sales increased 13% and the sales order backlog, a sign of future growth, rose 14%. The Fort Worth, Tex.-based company increased its guidance slightly for the next quarter. "The spring selling season is off to a great start," said Donald R. Horton, Chairman of the Board.
Real Estate Exchange Traded Funds
Real estate ETFs may offer a good way to focus on an industry but with lower risk. They allow investors to hold interests in multiple companies in a sector. Even if one goes sour, gains from others can offset the loss.
Real estate investment trusts (REITs) may provide another option that's safer than individual equities. A number of REITs have outpaced the S&P 500 since January, and that trend seems likely to continue. Investors might consider the SPDR S&P Homebuilders ETF, which consists of dozens of real estate related stocks.
They might also target the iShares Mortgage Real Estate Capped ETF and VanEck Vectors Mortgage REIT Income ETF, both of which have attractive expense ratios and expected monthly yields. Subsequently, REM currently has an expense ratio of 0.48%, but an 11.39% annual yield. MORT has a similarly low expense ratio (0.41%) and a 9.61% 12-month yield.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.