The housing market is going through the roof - here's how to play it

The housing market in the US is going from strength to strength, boosted by low mortgage rates and a flight out of urban areas amidst Covid-19. Homes have never been of greater importance to Americans.

Just last week the National Association of Home Builders’ housing index for August came in at 78, up from 72 a month ago and the highest it has been for 35 years. The index looks at expectations of single-family home sales over the next six months. Housing starts were also up 23% in July - the greatest month on month rise since October 2016. Given the increased demand amidst a backdrop of tight supply and under-building of new homes, prices continue to accelerate across many parts of the country.

It is therefore little surprise to have seen the homebuilders stocks rallying, with the SPDR S&P Housebuilders index up 40% in the last four weeks. And it's not just the housebuilders who have benefitted, as home improvements stocks including Lowe's and Home Depot have already rallied more than 30% this year.

So is there further room to run in the housebuilders? D.R. Horton - the largest housebuilder in the US, is already up 40% this year, as are shares of Lennar. As the environment for housing demand looks well positioned to continue, these stocks could continue to rally, but there may indeed be better value elsewhere in the sector.

Toll Brothers and Taylor Morrison Home have both lagged the broader sector despite having rallied 10% this year but both could be set to reward investors over the coming months. Toll Brothers may not appear an obvious winner within a recessionary environment given it's luxury homes, but the luxury bracket has been on the rise as well, and the company's move to affordable luxury homes looks to be perfectly timed with those in the "moving-up" demographic. The company trades at just 1.2x book having trailed the broader sector.

Taylor Morrison meanwhile, trading at just under book value, should benefit from its shift to the entry-level market - helped through the recent acquisition of William Lyon - as well as the demand for homebuyers moving-up. Investors have been fearful over how fruitful the synergies may be from the William Lyon takeover, but the increased access into new regions, together with the company's entry level footprint now being above 30%, could reward those with a little patience.

Whoever will outperform going forward in the sector, a lot will depend on whether trends such as working from home, urban flight and layoffs within professional service industries continue. Each of these will impact different geographies, and investors will then need to look further into the geographical exposure they which to take on within the housebuilders.

For now though, as the average price for a home in the US surges past $300,000, the sector as a whole remains incredibly compelling.