- Amid rising house prices, investors may want to consider how housing-related companies could find a home in their portfolios.
- Perhaps the biggest long-term catalyst for housing is heightened demand from the millennial generation.
- A lack of housing supply may create investment opportunities in the stocks of building companies.
- Home furnishings and services companies could also present opportunities.
The rapid rise in real estate prices across much of the country presents a dilemma for those who would hope to benefit from the surge in demand for houses. While you might be able to sell your own house for much more than you would have gotten a few years ago, buying or renting a new place will also cost more and the competition among buyers may be intense. If that sounds daunting, you may want to consider the stocks of real estate-related companies as a way to get exposure to residential real estate markets without having to sell your own house.
Fidelity fund managers who analyze the housing market say they are focused not only on building companies that directly increase the supply of houses in the US, but also on companies that can profit from the needs of homebuyers after they get the keys.
What's driving the boom
Mark Notkin, co-manager of Fidelity® Leveraged Company Stock Fund (FLVCX), believes the factors driving this housing boom are fundamentally different than those that drove the last one. While the housing bubble that peaked in 2006 was blown in part by reckless lending and weak regulation, the current increase in prices owes more to low supply and demographic-driven demand—trends that could keep demand high for a long time.
While the number of homes being built in recent years has been much lower than the pace set for most of the 1970s and 1980s, especially relative to the size of the US population, the millennial generation is entering the prime house-buying years—and moving the housing market, well, with their moves. Since 2014, this demographically outsized generation has been buying more houses than any other, accounting for 38% of all homebuyers in 2020, according to the National Association of Realtors.
Although many millennials are burdened with student debt, interest rates remain near all-time lows points out Dan Sherwood, Fidelity portfolio manager and equity analyst. He believes low interest rates should help keep home mortgages largely affordable. Beyond student debt, Sherwood says that consumer balance sheets look healthy, bolstered by recent government stimulus payments and more than a year of muted consumer spending due to the pandemic. He also sees the added benefits of a recovering jobs market and rising wages.
As house prices have risen to levels not seen since the run-up to the housing crash that preceded the global financial crisis, Notkin has added exposure to leading homebuilders Lennar (LEN) and PulteGroup (PHM).
Besides builders, this increase in homeownership is creating other investment opportunities in companies that sell products and services to those who already have the keys in their hands.
"Many millennials are devoting their financial resources to buying homes, taking on remodeling projects, and purchasing products to make their dwellings functional and comfortable," says Notkin. "This spending tends to drive sales of housing-related goods and services, ranging from furniture and appliances to mattresses and electronics."
Notkin says he and fellow manager Brian Chang have sought to capitalize on the millennial household formation trend by investing in firms they believe will attract millennials' money. These have included RH (RH) (formerly Restoration Hardware), which offers a variety of upscale home furnishings and fixtures, mattress manufacturer Tempur Sealy International (TPX), home-improvement chain Lowe's (LOW), and appliance maker Whirlpool (WHR). "I see household formation as a compelling long-term investment theme that can continue well beyond the pandemic," Notkin notes.
Dan Sherwood also sees opportunity in home furnishing suppliers and agrees that demographic factors mean these opportunities could be long-lived ones. "I still see a number of key drivers that could make the real estate sector a rewarding place to be invested for the next few years," he says.
Interested in investing in these housing trends? You may want to consider mutual funds and ETFs. You could also consider using our Mutual Funds Research tool. Fidelity® Leveraged Company Stock Fund (FLVCX) held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, click the fund trading symbols above.