Should You Add Homebuilders To Your Portfolio?

October 14, 2015 1:34 pm
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Home builders have seen a surge in demand this year as more Americans gain full-time employment and have the spending power to purchase their own homes. Government data showed that US residential construction spending exceeded $36 billion in August, the highest it’s been since 2007. While most agree that the housing market is on the road to recovery, others worry that adding homebuilders to their portfolio could be a risky move.

Who Is Buying?

One of the biggest questions for the housing market is whether or not owning a home is a priority to the ever important millennial generation. While a better job market means that young Americans may have the financial ability to purchase a home, many millennials are expected to opt for renting instead because of the flexibility it offers. This is also true for baby boomers, who are entering a downsizing phase and may want to rent in order to keep their options open.

Home Builders See Increased Demand

Despite those factors, homebuilders have seen a healthy increase in demand this year. The SPDR S&P Homebuilders ETF (XHB) has gained 25.69 percent since October 2014 and the iShares US Home Construction ETF(ITB) has gained 6.64 percent over the past six months. Big name builder Toll Brothers (NYSE: TOL) was recently upgraded from Equal Weight to Overweight by Morgan Stanley as the firm sees the luxury housing market expanding in 2016.

Still Some Risk

While demand paints a rosy picture for the US housing market, a labor shortage among builders could weigh on their growth. Attracting workers with necessary skills has become increasingly difficult as unemployment dwindles, that means completing houses is taking longer and costing more. This combination could lead to higher home prices, something that may suppress demand.

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