Housing stocks are surging after data shows new home construction jumped in March

• The iShares U.S. Home Construction ETF climbed Tuesday with shares of the country's largest home builders rising.
• The ETF rose after data showed housing starts for single-family homes rose 2.7% in March.

A $1.6 billion gauge of homebuilding stocks jumped on Tuesday after data showed a monthly increase in construction of new homes, a potential sign of stabilization in a housing market that's struggled from the blow of rising interest rates.

The iShares U.S. Home Construction ETF rose 2.2% to 72.63, the highest since early February when the index recorded a near one-year high at 73.90.

The move followed the Census Bureau's March report on housing starts, which included a 2.7% increase in construction in single-family homes to 861,000. That was higher than an upwardly revised 838,000 in February.

While the figure for single-family homes was a bright spot in the report, Bespoke Investment Group noted that on a 12-month average basis, housing starts have fallen for 10 consecutive months, a streak often associated with recessions. Home construction fell 0.8% to a 1.42 million annualized rate, with a decline in construction starts of multifamily units.

Despite the weakness in housing data, Bespoke outpointed that housing stocks have been rallying, pushing the ITB ETF close to 52-week highs.

The ETF and housing starts data have tended to track each other over the past ten years. But in December 2021, ITB peaked five months before the peak in housing starts.

"Since then, ITB troughed (on a monthly basis) last September even as Housing Starts continued to fall," said Bespoke. "They usually say the market looks six months forward, but in the case of housing stocks and housing data, recently it's been more like five," it said. "And when it comes to conflicting signals between the market and economic headlines, we'll always defer to the market."

The ITB ETF, which carries more than $1.6 billion in assets, has gained roughly 18% during 2023, outperforming the S&P 500's rise of about 8%. The fund has pushed through some dour signals from the US housing market, where prices have dropped, and homebuyers are running up against a jump in interest rates over the past year, beyond 6%.

But optimism among homebuilders has been building over the past four months and those companies are becoming less likely to offer discounts on new homes. The share of builders reducing prices was 30% in April, down from 35% in December, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

Stocks in the exchange-traded fund include the largest homebuilders in the US. DR Horton shares kicked up by 2.3% during Tuesday's session, stretching beyond $102 each for the first time in two months. Lennar gained 2.5% and PulteGroup picked up 3.4%.