# Homebuilder Stocks: Is a Rebound Finally on the Horizon?
Despite a persistent housing shortage, the performance of homebuilder stocks has lagged in recent years. Though, shifting economic conditions and a potential change in market sentiment suggest a possible turning point for the industry.
The relatively weak performance of shares in the homebuilding industry over the past two calendar years has been surprising, given the basic supply-demand imbalance. A long-running under-investment in new construction has created a meaningful housing shortage, coinciding with increased demand driven by demographic trends. Yet, an exchange-traded fund (ETF) tracking homebuilding stocks has, over the past five years, only matched the returns of the broader equity market – and at the cost of considerably higher volatility.
Is a recovery imminent? A key factor to watch is the recent decline in borrowing costs. The average long-term US mortgage rate, based on the 30-year fixed rate, fell to 6.16% last week,the lowest level in over three years,according to data from Freddie Mac. this easing of financial conditions could provide a much-needed boost to the sector.
According to a recent estimate from Goldman Sachs, “at least 3-4 million additional homes beyond normal construction need to be built to address the shortage in US housing supply and boost affordability.” This underscores the scale of the challenge – and the potential possibility – facing homebuilders.
However, several headwinds continue to restrain the industry. A decline in housing affordability, accelerated since the pandemic, and restrictive land-use regulations are significant obstacles, analysts at Goldman Sachs note. Recent data highlighting a drop in housing starts – falling to the lowest level in nearly six years in October – serves as a reminder that a swift recovery is unlikely.
Despite these challenges,the ongoing supply shortage is expected to eventually create favorable conditions for homebuilder stocks. Political support could also play a role. Reports indicate that the White House has recently engaged with industry officials to explore ways to improve affordability and offer assistance.
Early indicators suggest a shift in market sentiment. The S&P Homebuilders ETF (NYSE:XHB) has rallied more than 12% year-to-date thru January 15, significantly outpacing the 1.5% gain of the broader market, as measured by the SPDR S&P 500 ETF (NYSE:SPY).
However, analysts caution against reading too much into this early surge. While encouraging,a couple of weeks of gains may prove to be temporary “noise.” Over the past several years, homebuilders have consistently underperformed the overall equity market. For the trailing one-year period, SPY has delivered a return of 18.2%, compared to 6.4% for XHB.
If the tide is truly turning in favor of homebuilders, the investment case will become more compelling relative to stocks generally. One way to monitor this trend is by tracking the ratio of XHB to SPY.
As of now, the outlook for homebuilders outperforming the broader market in 2026 remains uncertain.
