Homebuilders Can't Build Fast Enough... And That's Great News for This Fund

America still has nowhere near enough homes to fill its housing shortage...

According to a recent report from Realtor.com, the U.S. is about 5.2 million single-family housing units short of current demand. That's up from 3.8 million in 2019.

Assuming the housing-sales pace continues at the five-year average, housing starts would have to triple to close the supply gap within five years.

The shortage has been ongoing since the COVID-19 pandemic began...

Regular readers know that the pandemic spurred an exodus from cities to suburbs. This fueled a surge in demand for single-family homes and led to a historic housing shortage, as well as record-high prices. At the same time, builders had stopped new production, so demand far outpaced supply.

If you look at the home-sales data now, you'd think that demand is slowing. But that's only because we're going up against last year's extremely high sales, so the growth doesn't look as impressive. Mortgage rates are still down near their historical lows. And that's going to keep demand high.

Now, builders are finally beginning to ramp up new-home construction to solve the supply issue...

According to Realtor.com, builders are on pace to increase new construction by 15% this year.

You can see this reflected in the past few months of housing-starts and building-permits data. The Census Bureau's monthly data show the rate at which homebuilders are preparing for new construction. A rise in these metrics – like we're seeing now – signals that homebuilders are working hard to build more homes and ease the current shortage.

It breaks down like this...

Housing starts is an indicator that shows the number of new houses where construction has begun – usually with buyers lined up. It's a good indication of current housing demand. Not only was August's reading for housing starts higher than last month's, it was 17% above the annual rate of housing starts from August 2020.

Building permits show what future housing demand looks like. When permit numbers increase (like we saw in both July and August), it means that builders are expecting strong future orders. So they're preparing to meet this higher demand. August's building permits were 6% above July's and 13.5% above August's numbers last year.

Both of these metrics remain near the highest levels in more than a decade, and came in above Wall Street's estimates. Still, that won't be enough to fix the shortage anytime soon. Builders will have to keep increasing construction if they're going to meet the demand.

This week, we're circling back to a fund that provides broad exposure to the companies that are reaping the rewards from the housing shortage and construction boom...

We last highlighted the iShares U.S. Home Construction Fund (BATS: ITB) as a way to play the trend of increasing new-home construction in December. At the time, the housing supply sat at 3.3 months, according to data from the St. Louis Federal Reserve. That meant it would take 3.3 months to sell all homes on the market at the sales pace in that moment.

Supply has increased since then, but as we explained above, builders still need to increase construction in order to meet demand. And that means more business for ITB's holdings.

The fund has more than 40 stocks in the home-construction sector. Its three largest holdings are homebuilding giants D.R. Horton (DHI), Lennar (LEN), and NVR (NVR). It also holds housing suppliers like Home Depot (HD), Lowe's (LOW), Masco (MAS), and Sherwin-Williams (SHW), which are all in its top 10 holdings.

All of these companies are set to thrive in a strong housing market with increased new-home construction. After all, builders will need paint from Sherwin-Williams, faucets and fixtures from Masco, and other supplies from Home Depot.

ITB shares have soared while the housing market has remained red-hot. The stock is up more than 23% over the past 12 months and has increased more than 170% from its March 2020 lows. But there still may be more gains ahead...

The housing-market boom is nowhere close to being over. Housing supply remains tight, meaning that builders will need to continue increasing new-home construction. That should fuel continued demand for products from the homebuilding and housing supply companies that ITB holds, fueling a rally in shares.

Sometimes investing is simple.