The average U.S. home is 42 years old, and new construction has not kept pace with population growth. New home starts are lower than 1970 levels despite the population rising by 140 million. Zoning restrictions, higher mortgage rates above 7%, rising construction costs from tariffs and labor shortages, and declining home prices in real terms have slowed the housing market.
The S&P Select Industry Homebuilders Index returned 7.3% annually over five years, trailing the S&P 500's 13.8%. Over the past 12 months, homebuilders underperformed by 28.1 percentage points.
Berkshire Hathaway purchased 11% of Lennar (LEN) as the stock fell from $126 to the low $80s. Lennar, a homebuilder with a $20 billion market value, trades at a price-to-earnings ratio of 16 and maintains a strong balance sheet with presence in Florida, Texas and Tennessee. Berkshire also acquired Taylor Morrison in July for $8.5 billion and owns stakes in NVR and D.R. Horton (DHI), the largest homebuilder by revenue.
For investors interested in housing exposure through funds, the State Street SPDR S&P Homebuilders ETF (XHB) holds 35 equally weighted companies including homebuilders and suppliers of materials and fixtures. It charges 0.35% in expenses. The iShares U.S. Home Construction ETF (ITB) holds about three dozen stocks weighted toward the five largest builders, with expenses of 0.37%. Both funds have averaged annual returns under 7% over five years.
Hoya Capital Housing (HOMZ) offers a smaller alternative with 100 evenly weighted companies across homebuilders, building materials, apartment REITs like Welltower (WELL), and home improvement retailers. It charges 0.30% in expenses.
Home Depot (HD) stock fell 29.1% over the past year but yields 3.2%. The company maintains 2,364 stores and paid its 158th consecutive quarterly dividend, though frozen at the previous rate.