As real estate prices continue to climb, homebuilders could continue to see growth in 2022 if the sector can overcome forthcoming headwinds.
Credit agency firm Fitch Ratings notes that the homebuilding sector could see modest demand and revenue growth, but inflation could also be a factor. Rising costs for materials will put pressure on profit margins, which could push prices even higher.
Nonetheless, as the economy continues to recover from the effects of the pandemic, homebuilders stand to benefit. As mentioned, rising costs for materials will push prices higher, but that could be to the detriment of prospective home buyers in terms of affordability, affecting demand in the process.
“The sector will continue to benefit from healthy economic growth and favorable demographic trends, including flexible work arrangements that will draw buyers to suburban areas and drive new home sales,” Fitch Ratings says. “However, concerns over affordability will weaken demand as home price appreciation continues and the prospect of higher interest rates could further hamper affordability. Fitch projects housing activity will be relatively flat in 2022 compared with 2021.”
Still, Fitch sees revenues growing despite these potential challenges.
“Fitch projects revenues for U.S. homebuilders in Fitch’s coverage will grow about 10%, on average, in 2022 driven by modestly stronger deliveries and higher average sales price of homes in backlog,” the credit agency says. “However, Fitch expects flat to slightly lower margins next year following record levels in 2021 from the strong pricing environment. Supply chain issues and material and wage inflation will increase costs for homebuilders, and affordability issues will likely limit homebuilders’ ability to continually raise prices, which will pressure margins.”
Lever Up on Homebuilders or Real Estate
If the sector can push past potential challenges, traders can play the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL ). NAIL seeks daily investment results of 300% of the daily performance of the Dow Jones U.S. Select Home Construction Index, which measures U.S. companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers, and suppliers of building materials, furnishings, and fixtures.
Traders looking for something less concentrated in homebuilding can opt for a broader real estate sector play with the Direxion Daily MSCI Real Estate Bull 3X ETF (DRN ). DRN seeks daily investment results equal to 300% of the daily performance of the MSCI US IMI Real Estate 25/50 Index, which is designed to measure the performance of the large-, mid-, and small-capitalization segments of the U.S. equity universe that are classified in the real estate sector as per the GICS.
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