Homebuilding stocks, which fell deep into a bear market in 2018, have rebounded an impressive 17% the year, as measured by the SPDR S&P Homebuilders ETF (XHB). The once beaten-down sector has charged well ahead of the market, beating the S&P 500’s 12.5% gain year-to-date, on track for its best quarter in seven years. Investors and analysts say the rebound can be attributed to Fed-induced low mortgage rates and interest rates, per several articles including a CNBC column. Below is a table of the sector's performance.

Homebuilding Stocks Rebound

(YTD Performance)

  • Toll Brothers Inc. (TOL); 9.8%
  • Lennar Corp. (LEN); 25.6%
  • Beazer Homes USA Inc. (BZH); 22.3%
  • SPDR S&P Homebuilders ETF (XHB); 17.3%
  • S&P 500 Index; 12.5%

Source: Investopedia

To be sure, homebuilders face continuing obstacles. For example, shares of all major stocks in the sector pulled back modestly on Tuesday on news of slowing housing activity, including Lennar Corp. (LEN), PulteGroup Inc. (PHM), Beazer Homes USA Inc. (BZH) and Toll Brothers Inc (TOL). The S&P 500 CoreLogic Case-Shiller index posted its slowest pace of annual growth since 2012, raising concerns that the housing market has reached an inflection point after years of runaway growth, per MarketWatch. Even with that bad news, most homebuilding stocks were down less than 1%.

Fed-Fueled Low Interest Rates

Many investors and industry experts say the Fed's dovishness, with the U.S. 10-year Treasury yield at a one year low, will create a benign environment in which these stocks can continue to grow.

One of those bulls is Mary Ann Bartels, head of ETF strategy at Bank of America Merrill Lynch. She suggests that the current environment is similar to the rally in homebuilding stocks rally in 2012. "Homebuilders did well in 2012. Well, we had a bear market in 2011. We just had a bear market in December. Homebuilders were down over 30 percent," Bartels told CNBC. She noted that below average interest rates are typically "very positive for the industry.”

Investors will learn more about the sector's health when KB Home reports quarterly results after the market closes on Tuesday, followed by Lennar on Wednesday.

Looking Ahead

While the housing market looks strong, some analysts recommend playing on the “theme,” rather than the sector. Dave Nadig, managing director of ETF.com, says he has stocks such as Lowe’s Companies Inc. (LOW) and Owens Corning (OC) at the top of his holdings, which he views as more of an indirect play on home construction, per CNBC. Those kinds of plays may help hedge against wild swings in housing stocks.