Momentum Building: The Residential Construction Industry Is Poised for a Breakout

The U.S. residential construction sector has been in turmoil compared to the previous year, largely thanks to the Federal Reserve’s growing optimism for interest rate cuts throughout 2024.

Over the previous year, the sector ETF has significantly outperformed the broader market. During that time, the SPDR S&P 500 Homebuilders ETF New York Stock Exchange: XHB is up more than 41% versus overall markets, with SPDR S&P 500 ETF Trust NYSE: SPY returning just above 20%. Individual ETF-specific holdings have seen even larger returns, with Lennar’s shares returning close to 50% and PulteGroup’s just under 100% over the same period, without taking dividends into account.

The demand for new homes is increasing dramatically

The real estate sector has seen an increase in demand for new homes due to a shortage of inventory in the resale market. Stuart Miller, co-CEO of Lennar, highlighted this deficiency during the company’s fiscal fourth-quarter earnings presentation in December, noting strong demand for affordable housing.

Many homeowners keep their mortgages low-interest, causing the existing home market to remain quiet. The industry expects an increase in demand as interest rates are expected to decline, with Lennar predicting a 10% increase in home deliveries for 2024. Miller highlighted the company’s commitment to addressing the continuing shortage of housing and expressed optimism that lower interest rates will stimulate demand.

This pent-up demand is reflected in the Home Builders ETF chart as XHB continues to consolidate in an increasingly tight range near its 52-week high.

So, as bullish sentiment grows and the chart indicates that a breakout may occur, is now the time to invest? Well, let’s take a closer look.

Sector ETF prepares for breakout

After showing strong growth and outperforming the market in 2023, the sector has maintained impressive performance this year. Although the overall change in its value during the year is minimal, a technical analysis reveals a bullish consolidation pattern. The sector ETF consolidated above key rising moving averages, suggesting that a long-term uptrend is taking shape and stabilizing. Furthermore, consolidation near its highest point in the last 52 weeks indicates a likely breakout, with buyers showing interest in the stock at higher prices.

While the sector as a whole appears poised for higher prices, how do some of its top-performing 2023 holdings shape up in the new year? Let’s take a closer look at two of its top-performing holdings from the previous year to see whether or not they share the same sentiment going forward.

PulteGroup NYSE: PHM

PHM is the seventh largest sector ETF holding with a 3.93% weighting in the ETF. The homebuilder was a standout performer in the industry with a nearly 100% increase over the previous year.

Notably, analysts have been consistently bullish on the stock and have maintained their Moderate Buy rating for over a year, with twelve analysts rating the stock as a Buy and five as a Hold. Most recently, on January 11, Goldman Sachs Group increased its target from $91 to $105.

Like the sector in general, PHM is consolidating near its high, in the upper region of its 52-week range, indicating positive momentum and overall strength. With a consistent uptrend, bullish consolidation, and an RSI that does not indicate overbought territory, PHM appears poised to reach new 52-week highs in the near term.

Lennar NYSE:LEN

LEN is the ETF’s 13th largest holding, with a weight of 3.72%. Like PHM, Lennar stock offers an attractive dividend yield of 1.35% and a fair valuation with a P/E of 10.78.

However, despite the positive metrics and outperformance over the previous year, with the stock up nearly 50%, analysts are currently mixed on the stock. Based on seventeen analyst ratings, the stock has a Hold rating and a consensus price target of more than 5% downside. While its rating is in line with the consensus rating for the S&P 500, it is lower than the consensus rating for construction companies, a Moderate Buy.

Chart-wise, however, it has set up similarly to PHM and the broader sector, as shares are consolidating above rising moving averages, near its 52-week high, indicating a potential breakout in the short term.

Before you consider PulteGroup, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and PulteGroup wasn’t on the list.

While PulteGroup currently has a “Moderate Buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here