The U.S. housing recovery picked up steam in 2013.
Home prices increased 10.9%, their biggest annual increase since the recession. Foreclosures are down 33% since the end of 2012. Meanwhile, home sales continued to surge. New-home sales were up 22% year over year in October, the most recent month for which data was available.
Despite all that, housing stocks actually underperformed the market.
The performance was far from poor. The two ETFs that track the housing industry – the iShares U.S. Home Construction (ITB) and the SPDR S&P Homebuilders (XHB) – were up 17.3% and 25.2%, respectively, in 2013.
Ordinarily, those would be strong returns. But 2013 was no ordinary year. The S&P 500 advanced 29.1%, better than any year since 1997.
So, if you were invested solely in the housing recovery last year, your returns were below average. Chalk it up partly to a monster 2012 for housing stocks. The ITB and XHB were up 78% and 55%, respectively, that year, while the S&P was “only” up 13.4%. So, in essence, last year’s improved housing data was already priced in to most housing stocks.
What last year’s modest gains have done, however, is make housing stocks more affordable. The top 10 holdings in both the ITB and the XHB are trading at roughly 15 times forward earnings – less than the 16 times forward earnings that the S&P 500 is going for these days.
Given the current real estate market outlook, the modest valuation makes housing stocks look even more appealing.
Home prices aren’t expected to make the quantum leap forward in 2014 that they did in 2013. Most economists are projecting 3% to 5% gains in U.S. housing prices. That has more to do with supply than demand.
New homes are being built, and supply is on the rise. With the percent of U.S. homeowners dipping below 65% for the first time in nearly two decades, there are more people than usual in the market to buy a home. And according to the National Association of Realtors’ “Affordability Index,” housing is more affordable now than it has been at any time in the 40 years since the index was created.
An increasing supply of historically affordable houses should make for another good year in the housing market. That bodes well for homebuilders, construction companies and other housing-related companies such as Home Depot (NYSE: HD), Lowe’s (NYSE: LOW) and Pier 1 (NYSE: PIR).
The improving housing market has been one of the main drivers behind America’s post-recession recovery. With home prices still 31.5% below their 2006 peak, the housing market still has plenty of recovering left to do – as long as the U.S. economy continues to improve.
Fortunately, investors haven’t missed the boat on the real estate renaissance. Housing may have led the economic recovery of late. But housing stocks lagged the broad market last year.
What it’s done is create an ideal buying opportunity in a red-hot sector. Odds are that housing stocks won’t be so cheap this time next year.
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