Editor’s Note: Jim Pearce has edited Personal Finance — now in its 51st year of continuous print — through rate cycles, sector rotations, and every other market environment since taking the helm. Today’s article reflects the same analytical discipline he brings to his current portfolio. His new Personal Finance briefing makes the case for which undervalued sectors are set up for a recovery — and why the patient investor has an edge right now. See Jim Pearce’s current briefing →

In March 2025, I explained why a “Drop in Consumer Confidence is Taking a Toll on Homebuilders.” At that time, the Consumer Confidence Index issued by The Conference Board (TCB) was at its lowest level in more than four years.

The press release accompanying that result noted, “worries about the economy and labor market have started to spread into consumers’ assessments of their personal situations.” Those worries were exacerbated by trade war threats from the Trump administration.

Wall Street was afraid that steep import tariffs might stifle the economy while reigniting inflation, which would suppress demand for new homes. Those fears partly proved true, but not to the point of triggering a recession. New home sales have slowed down, while the median price of those homes has fallen at the same time.

Two weeks ago, the US Census Bureau reported that “sales of new single-family houses in August 2026 were at a seasonally-adjusted annual rate of 684,000,” which was “2.0 percent below the August 2025 rate of 698,000.”

Rate Sensitive

Now, the problem is rising interest rates, which makes mortgages more expensive. The Fed raised its policy rate by a quarter point last month and indicated that it will probably make another quarter point before this year is over.

All those concerns explain why the State Street SPDR S&P Homebuilders ETF (NYSE: XHB) has gained no ground since December 2023. Over the past twelve months, XHB is down more than 13 percent while the S&P 500 Index has gained more than 14 percent.

The fund’s stated objective is “to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Homebuilders Select Industry Index.” For that reason, it only owns shares of homebuilders, building products manufacturers, home improvement retailers, and household furniture and appliance sellers.

To be sure, the past couple of years have been tough for that sector of the economy. But once the Fed is done raising rates and fuel prices start coming down, more consumers may feel confident enough to commit to a new home purchase.

Next Level

It is widely said that the stock market anticipates where the economy will be in six to nine months. If true, then now may be a good time to invest in homebuilders. By then, the Fed could be done raising rates, and fuel prices should be back to their pre-war levels.

Of course, the simplest way to participate in a resurgence by homebuilders is to buy shares of XHB. The fund’s current distribution yield of 1.1 percent is more than three times its annual expense ratio of 0.35 percent.

If you want to compound that result, consider purchasing a call option on XHB. A call option increases in value when the price of the underlying security goes up.

Last week, while XHB was trading at a little under $97, the call option that expires in June 2027 at the $95 strike price could be bought for $12. For that trade to be profitable, XHB must rise above $109.

Bear in mind, XHB traded as high as $123 eight months ago. If it can retrace that movement within the next nine months, the options trade outlined above would more than double in value.

The homebuilder setup I described above illustrates a principle I’ve applied for more than a decade at Personal Finance: when the market anticipates six to nine months out, the time to act is before the headlines confirm the recovery. Rate-sensitive sectors that have underperformed for two years while the underlying demand story remains intact don’t stay mispriced indefinitely. The same framework I’m using to evaluate homebuilders is what drives every position in my current portfolio — quality businesses trading at a discount, where the market is overpunishing a fixable problem. If you’d like to see the full portfolio and the reasoning behind it, my latest Personal Finance briefing is the place to start. Read the AI Margin Rotation briefing →