Heading into 2019, there are few bets more contrarian than U.S. housing. Since January, investors have been selling off anything construction-related. Homebuilder stocks have been halved in many cases. Building products suppliers and distributors have performed just as poorly — if not worse. Even Home Depot (NYSE:HD), one of the best large-cap stocks in the market since the financial crisis, and one of the best companies in America period, has dropped 20% in a matter of months. As a result, the iShares US Home Construction ETF (BATS:ITB) has declined sharply. ITB shares are down nearly 30% so far this year – and by more than one-third from late January highs.
There are some reasons for the selloff, admittedly. ITB is homebuilder-heavy, and rising interest rates appear to have caused new home demand to soften. Inflation, labor shortages and tariffs are driving expenses higher. Homebuilders, and their suppliers, look pressured in terms of both revenue and costs.
But at this point, the bad news looks priced in … or close. Yet there are multiple catalysts to send the group higher. Any resolution of the trade war with China would help the sector. Earnings can stay strong, as they’ve been for much of 2018. Housing starts can re-accelerate from post-crisis levels that remain well below historical trends.