Homebuilders have struggled in 2026 and underperformed the wider market
Rising interest rates has made affordability a pressing issue for U.S. homebuyers
The yield on the U.S. ten-year note is rising towards the high end of its multi-year trading range.
The effect of these higher yields has been to depress sentiment - and valuations - among U.S. homebuilders. However, buying the homebuilders on their current price-to-book multiples has been a successful strategy in recent years and this makes the sector the favorite investment of Michael Darda.
Darda is the chief economist and strategist at Roth Capital Partners, an equity research boutique based out of Newport Beach in California. After recent output generated questions from clients, Darda wrote up what is essentially an extended quick client Q&A note as a separate report and published it Tuesday.
A familiar inquiry after his recent notes has been "What is your favorite sector here?" Information technology is the one with the most fundamental appeal but what might interest investors more, perhaps, is his "favorite trade" - the contrarian call of the homebuilders, a part of the market where sentiment has been moribund throughout 2026.
The National Association of Home Builders confidence index fell to the low of the year in July, a reading of just 34 on a 0-to-100 scale, as pending home sales slumped 5.4% in June, according to a separate report.
Share prices have reacted accordingly. The iShares U.S. Home Construction exchange-traded fund ITB has declined 1% this year and the State Street SPDR S&P Homebuilders ETF XHB is down 3%.
The rise in U.S. 10-year BX:TMUBMUSD10Y yields to the present level of 4.64%, versus the 4% or so witnessed in 2025. discourages borrowing to buy real estate.
Roth's strategist sniffs an opportunity here. Rising rates and this depressed investor sentiment have compressed the price-to-book ratio to 1.7 times. In the last several years "selling the builders at 2.7 times P/B and buying them at 1.7 times has been a highly profitable endeavour" Darda writes.
A trading range of 2.7x P/B to 1.7X P/B has been loosely establihsed in recent years
However, Darda is cautious on timing. "It will not happen overnight," he warns and it will take a long period of income growth before affordability improves. Darda likes the trade because he thinks bond yields have limited upside and the chart looks supportive.
-Jules Rimmer
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(END) Dow Jones Newswires
July 22, 2026 07:26 ET (11:26 GMT)
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