The housing market is at a critical juncture right now. The space is mired with higher interest rates that weighed on buyers’ ability and lower availability resulting in higher home prices. The supply chain issues amid the pandemic and the Russia-Ukraine war increased the materials costs and boosted home prices further.

Hence, home sales have been dwindling. U.S. existing home sales (that comprises about 90% of the market) declined by 2.4% to a seasonally adjusted annual rate of 5.61 million in April of 2022, the lowest since June of 2020 and slightly below forecasts of 5.65 million.

New home sales in the United States sank 16.6% mom to a seasonally adjusted annual rate of 591,000 in April of 2022, the lowest since April of 2020 and well below forecasts of 750,00. The iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) is down 27.9% this year.

Valuation is Cheap

After a crash in housing stocks and ETFs, we can conclude that the sector is available at cheap, though most investors are not buying. The average forward price/earnings ratio of homebuilder stock prices to projected 2022 earnings was only 4.1 times earnings, the lowest of any industry in the entire U.S. stock market. This comes against the S&P 500’s P/E of 18.13X. Price-to-book ratio is 0.97X versus 5.02X possessed by the S&P 500. Price/Sales ratio is 0.61X versus 2.94X P/S ratio of the S&P 500.

The Zacks Industry Rank of the homebuilding falls in the top 28% segment. About 19% of the stock is Buy-rated. TipRanks’ Hedge Fund Trading Activity tool shows that Hedge Funds increased holdings for the likes of Beazer Homes, NVR, Lennar, Tri Pointe and MI Homes last quarter.

Though mortgage rates are expected to remain high in the coming days, they’re still quite low and will likely remain that way for at least the next year or two, as quoted on CNBC. 30-Year Mortgage rates are currently running over 5%. Buyers paid 8% to 9% rates in 2000 or 10% to 11% a decade earlier.

Historically, the nation has had a running supply of about 1.5 million homes available for purchase. The current inventory of single- and multi-family available homes — about 700,000 — is the lowest in more than 40 years, the CNBC article noted. This means no matter how high is the interest rate, there will always be buyers for such low supplies and that too at a high price.

Home Buying: Millennials’ Preference

Though the percentage of millennials staying with their parents has risen over the years, many millennials are now reaching prime home-buying age — 30 to 35 years old — and that could drive sales for homebuilding companies.

John Lovallo, home builder analyst for Bank of America Merrill Lynch, noted that “in 2025 there are going to be 3 million more millennials than baby boomers at their peak in 1987,” which could propel the home-buying industry.

Per research by Global X, millennials now earn about $2 trillion, with income projected to grow to $8 trillion by 2025. Not only this, millennials are likely to inherit as much as $68 trillion from their parents, per a CNBC article.

ETFs in Focus

Against this backdrop, we expect homebuilding ETFs like iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) , SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) and Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - Free Report) to gain ahead. All three ETFs have a Zacks Rank #2 (Buy).