Surging Home Sales Could Push Real Estate Stocks Higher

By Sean Michael Cummings, analyst, True Wealth

Demand for homes roared back in February...

That's a huge change from last year. Heck, almost no one was buying homes in 2022.

You can thank rising interest rates for that. Thirty-year mortgage rates more than doubled. That crushed housing affordability. And many buyers got priced out of the market. At the same time, owners resisted selling homes they bought at pre-pandemic rates.

Things are changing now, though. And a new boom in housing demand could set real estate stocks up for a big year.

Let me explain...

It's no wonder housing slowed to a crawl in 2022. The two years before the slowdown were crazy...

The pandemic stimulus efforts meant that borrowing was cheap. Combine that with the limited housing supply, and homes sold practically overnight. Prices soared as the market heated up.

Then, interest rates and inflation started taking their toll... and it all came crashing down. The result was a year of declining sales.

A dramatic shift happened in February, though. We can best see it in the National Association of Realtors Existing-Home Sales.

This data tells us how many closing contracts were signed on houses, condos, townhomes, and co-ops in a given month. It's also seasonally adjusted, which blocks out the noise of an annual housing cycle.

Existing-home sales slumped throughout last year. But they made a strong rebound in February. Take a look...

Existing-home sales surged 14.5% in February. It was the third-biggest rally on record, after June and July's rallies in 2020. And according to history, it could kick off a great year for real estate stocks...

We can see this by using the Real Estate Select Sector SPDR Fund (XLRE). This exchange-traded fund holds a broad basket of real estate companies. So it's a good stand-in for the sector at large.

I wanted to see what big jumps in existing-home sales meant for the sector. So I looked at how XLRE performed after each 5%-plus monthly jump since 2015.

Before last month, this kind of move had happened only six other times. That means it's darn rare. And as you might expect, XLRE outperformed the following year. Take a look...

Real estate stocks have returned about 2% annually in the past eight years. But history shows buying after a spike in existing-home sales can juice those returns. Similar setups have led to massive gains of 17% over the next year in XLRE.

Even more, real estate stocks had positive returns after four of the six previous setups... And the two losing trades were barely in the red. So the risk from here is low.

This idea makes logical sense, too. Real estate companies get more business as homebuying increases. So the February jump means more overall activity in the housing market, which should mean bigger gains for real estate stocks.

This is a contrarian idea. Most folks believe housing and real estate are dead. But the reality is much different... And it makes owning this sector a smart move right now.

Good investing,

Sean Michael Cummings

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