By Shaina Mishkin
Home builder stocks are having a hopeful start to the year. There are plenty of reasons to expect that 2026 will be better for the housing market.
The iShares U.S. Home Construction exchange-traded fund, which includes home builders and related companies, is up 2.8% so far this year. That is only three trading days -- but it's the ETF's best three-day start to the year since 2023, according to Dow Jones Market Data. The S&P 500 is up roughly 1.5% over the same time.
The fund's gain was led by building materials companies. But the housing market is primed to improve, UBS analyst John Lovallo wrote in a Tuesday note. He estimates new home sales rising 2% to 679,000 in 2026, after having fallen an anticipated 3% in 2025.
Among the bright spots: nationally, there's still plenty of need for new housing. In places like Dallas and Tampa, Fla., where new home inventory was stacking up, channel checks show the number of listings has stabilized, he wrote. Plus, the bank's survey of consumer housing intentions found that respondents' will to buy was higher than usual.
Public builders' orders will outgrow the broader market's pickup in new sales, the analyst wrote. He expects that a group including D.R. Horton, KB Home, Lennar, Meritage Homes, NVR, PulteGroup, and Toll Brothers will see orders grow 5.1% on average as they take market share from smaller private builders.
Builders as a group had a tough 2025. Stocks were, at different times, struck by tariff fears, consumer confidence concerns, and political worries. The headwind with perhaps the most lasting power was margin compression caused by weak consumer demand: many builders offered buyers incentives and discounts to close deals, which ate away at builders' profit margins.
Lovallo expects home builder margins to continue to erode on average in 2026, but notes that a slight reduction in mortgage rate buy-downs, a popular incentive in which a builder pays to temporarily or permanently lower a buyer's mortgage rate, could flatten margins out instead.
Investors looking for signals of the health of the new home market will get some long-awaited, if lagging, data on Friday. The Census Bureau is slated to release its September and October housing starts readings. New home sales data for the same months are expected on Jan. 13. The data, which would have been released in October and November, was delayed by the 2025 government shutdown.
The direction of the economy and federal policy remains a wildcard. President Donald Trump has said that housing reform plans are coming, but barring details or an announcement, the potential timing and impact on buyers, builders, and stocks remain unclear.
"The most significant risk for housing in 2026 is the health of the economy and its impact on consumer confidence," Lovallo wrote. "Lack of consumer confidence essentially delays purchase decisions, particularly for larger ticket items such as a home."
The analyst sees PulteGroup, one of the nation's largest home builders, as best positioned for whatever the new year holds. He rates the stock Buy with a $159 price target. "Its sizable exposure to first-time buyers will allow it to participate in the fastest-growing portion of the market if consumer confidence improves, but also provides exposure to more affluent buyers, many of which already own a home with significant equity accumulated, which could prove more resilient if the economy and overall housing activity remain muted in 2026," he wrote.
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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(END) Dow Jones Newswires
January 07, 2026 04:00 ET (09:00 GMT)
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