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Homebuilder stocks suffered last year as the Federal Reserve raised rates aggressively. The housing market, which had plunged from its pandemic-driven highs, is showing signs of stabilization lately.

Homebuilder sentiment has improved for three consecutive months. New home sales rose in March to the highest level in a year. Per CNBC, almost half of the homes on the market are selling within two weeks.

Spring is usually the most important season for the housing market. Mortgage rates are now off their recent peak but remain quite high. While affordability remains a problem, cancellations are down.

Several large homebuilders reported results in the past few weeks, and earnings were generally better than expected. The iShares U.S. Home Construction ETF (ITB - Free Report) and the SPDR S&P Homebuilders ETF (XHB - Free Report) have rebounded nicely and are up about 23% and 16% respectively year-to-date.

ITB tracks a market cap-weighted index of home construction and related stocks. It is top heavy with four holdings--D.R. Horton (DHI - Free Report), Lennar (LEN - Free Report), NVR (NVR - Free Report), and PulteGroup (PHM - Free Report) --accounting for about 45% of the portfolio.

XHB is an equal-weighted ETF that has significant exposure to building products and home-furnishing companies as well in addition to homebuilders.

Tracey likes Toll Brothers (TOL - Free Report), the luxury homebuilder, and M.D.C. Holdings (MDC - Free Report), which pays the biggest dividend at 4.9% but is not very well known. However, she reminds us that homebuilder stocks always rise on the "hope" trade into the summer, and then weaken. Investors should wait for a pullback.

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