The relatively weak performance of shares in the homebuilder industry for the past two calendar years is, on first glance, surprising. A long-running under-investment in home building has created a housing shortage at a time of a demographic-drive rise in demand. But holding an ETF that tracks shares in the homebuilding industry has only matched the return of the broad equity market over the past five years but at a cost of sharply higher volatility.

It’s timely to wonder if the fortunes of homebuilder stocks are poised to improve. One catalyst for change is the slide 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 in over three years, according to mortgage buyer Freddie Mac.

Softer borrowing costs should be a net plus at a time when, according to a recent Goldman Sachs estimate: “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.”
 

Despite the supply-demand tailwind, several factors have slowed the industry, including a decline in housing affordability that’s accelerated since the pandemic and various land-use restrictions, Goldman analysts note. Last week’s news that US housing starts in October fell to lowest level in nearly six years reminds that a quick fix doesn’t look imminent.

But the ongoing supply shortage, in time, will likely create conditions for a stronger run in homebuilder stocks. Politics may be a supporting factor too. The White House in recent weeks has reportedly met with industrial officials on ways to improve affordability and how the administration could help.

In a possible early hint of things to come, market sentiment has turned firmly bullish on homebuilders this year. The S&P Homebuilders ETF (XHB) has rallied more than 12% year to date through Thursday’s close(Jan. 15), far above the broad stock market’s 1.5% gain, based on the SPDR S&P 500 ETF (SPY).

Encouraging, but a couple of weeks could be noise. Meanwhile, homebuilders are still far behind equities overall for the past several years. For the trailing one-year window, for instance, SPY is handily outperforming XHB: 18.2% vs. 6.4%.

If the tide begins turning in favor of homebuilders, the investment case will look more convincing in relative terms against stocks generally. One way to monitor the trend is by tracking the ratio of XHB to SPY.
 

Despite the recent pop in homebuilder shares, it’s not clear that the industry’s relatively weak performance since 2024 has run its course. A stronger sign that the cycle is turning would arise when the 50-day average for this ratio recovers and rises above the 200-day average. On that basis, the jury’s still out if homebuilders are poised to outshine the broad market in 2026.

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