By Paul R. La Monica

Home was not where the heart was for investors this year. That could change in 2026.

Housing stocks have stagnated due to concerns about high mortgage rates, tariffs lifting construction costs, and out-of-reach home prices. As a result, two top housing-related exchange-traded funds have missed out on this year's market rally. The iShares U.S. Home Construction exchange-traded fund is down about 0.6% this year, while the State Street SPDR S&P Homebuilders ETF is up just 4.3%.

But investors -- and some industry executives -- are growing more hopeful about 2026. Builder stocks rallied after the Federal Reserve lowered interest rates on Dec. 10, its third rate cut since September. Mortgage rates, which have already fallen from a peak of about 7% for a 30-year fixed home loan in January down to 6.2% by mid-December, could head even lower. Economists at real estate information firm Redfin added in a recent report that 2026 should be the start of what it calls the Great Housing Reset, "a years-long period of gradual increases in home sales and normalization of prices."

Two prominent builders, Lennar and KB Home, will report their latest earnings this coming week. Investors are hoping the companies are a little more upbeat about next year, especially after recent results from builders Hovnanian Enterprises and Toll Brothers put pressure on the sector earlier this month. Still, even though the current results were far from phenomenal, the tone of their CEOs was cautiously optimistic.

Hovnanian CEO Ara Hovnanian said that "buyers are definitely out there looking" but they are "hesitating at the moment" due to economic uncertainty. "That will eventually pass," he continued. And Toll Brothers CEO Douglas Yearley admitted that his company was being conservative with its outlook even though there are reasons for encouragement, particularly due to lower mortgage rates. "We also recognize that the underlying fundamentals that fuel housing demand in the long term have not changed," he said, noting that demographics are favorable and housing supplies are tight. "All of these trends support demand for new homes."

A 2026 housing uptick doesn't look priced into the builder stocks. The iShares ETF is trading for just 14 times earnings estimates for 2026. KB Home, Toll Brothers, and DR Horton are even cheaper, with forward price/earnings ratios in the high-single-digits to low-double-digits range.

Darius Dale, founder and CEO of 42 Macro, an investment research firm, is bullish on the builders. He thinks that politicians in Washington will do all they can in a midterm election year to try to boost housing demand. "The administration may throw the kitchen sink at the market to try and fix housing," he said. "That favors builder stocks, building suppliers, and retailers like Home Depot and Lowe's."

Nancy Tengler, CEO of Laffer Tengler Investments, agreed. "We can see regulatory relief from Washington. Whether it is through first-time buyer tax credits or additional incentives to home builders to increase supply, we believe the housing-related stocks will start to reflect expected improvement in the environment," she wrote in a report, adding that DR Horton is one of her favorite stocks for 2026.

As Redfin notes, the housing recovery will take time. But the worst may be over. And that's something to build on.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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December 12, 2025 01:30 ET (06:30 GMT)

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