The US housing market continues to face headwinds, with higher mortgage rates, rising material costs, and limited land supply keeping potential buyers on the sidelines. However, for discerning investors, these challenges also create opportunities, particularly in corporate stocks with strong fundamentals that can still have good prospects for growth despite insufficient housing supply.

High mortgage rates have left many potential buyers on the sidelines, exacerbating the housing affordability crisis. According to a recent survey by the National Association of Home Builders (NAHB), more than 75% of respondents said that the US faces housing affordability issues, and the situation has not improved even after the overall economy stabilizes.

Although the US unemployment rate remained around 4% and inflation generally declined in the second half of 2024, the US housing market is still structurally undersupplied. Construction costs and zoning regulations continue to limit the number of new homes to be built, while a shortage of skilled workers has also slowed development progress. Coupled with these supply bottlenecks, demographic trends continue to support demand, especially the millennial generation, which is now the largest population group in the US.

Furthermore, the so-called “lock-up effect” — that is, existing homeowners, especially baby boomers, insist on not selling their homes because they want to keep interest rates low — remains a major problem. Many homeowners choose to stay the way they are because 78% of their mortgages are locked below 5%. The lack of sales of existing homes has also limited the supply of housing in the market. This kept housing inventories below normal levels despite higher borrowing costs, which in turn drove up housing prices.

Despite these challenges, the long-term fundamentals of the housing market remain strong, thanks to demographic trends and a resilient job market. Large homebuilders are able to adapt to the current market environment through scale, strong balance sheets, and capital allocation strategies. In fact, the latest data shows that housing starts have remained relatively stable, thanks to the demand of millennials entering the peak period of home buying.

Many homebuilders are offering creative incentives, such as price discounts and mortgage rate buydown programs, to address affordability issues. These strategies have helped ease some of the profit pressure caused by rising costs, and have also enabled large builders to surpass smaller rivals in competition. According to data from the investment research institute Morningstar, the premium for newly built housing compared to second-hand housing fell from 20% in history to about 10%, further supporting new home sales.

The home improvement market is also showing opportunities. As homeowners have low-interest mortgage loans, more and more people are choosing to upgrade their existing homes rather than relocate. Despite a slight slowdown in spending in this area after the pandemic, the home improvement market is expected to continue to grow in the long run as baby boomers prepare to “enjoy their old age” and are increasingly interested in sustainable, energy-efficient homes.

By focusing on companies that match these trends, investors can find attractive investment opportunities in the real estate sector. The following companies have performed well and have good prospects for development:

Houghton Homes (DHI.N): As the largest home builder in the US, Horton Homes has successfully expanded its market share despite a wide range of industry challenges. With its cost advantage, scale, and entry-level product line, the company is able to offer competitive prices and maintain healthy profit margins. Its mortgage rate buyback program has also helped attract first-time buyers in the current interest rate environment.

Sherwin-Williams (SHW.N): As a leader in the US architectural coatings market, Sherwin-Williams continues to benefit from its strong brand, extensive distribution network, and exclusive partnerships with top homebuilders. As homeowners pay more and more attention to decoration and energy-saving upgrades, the company is expected to further expand its market share in the home improvement industry.

EFX.N: As a leading consumer credit reporting agency, Acofee will benefit when mortgage interest rates fall in the future, which may stimulate refinancing activities and attract new buyers. With its deep data network and strong relationships with payroll providers, the company is well-positioned to continue to grow in the mortgage market.

Demand for housing is expected to remain strong, driven mainly by millennials, and supported by a healthy American job market. Although baby boomers and other homeowners “lock in” their properties due to low interest rates, falling interest rates could release more supply and stimulate the market. However, whether interest rates remain high or declining, there are opportunities for investors to identify real estate-related companies with strong fundamentals to benefit from these trends and thrive.