The U.S. housing market roared in July, but investors may want to tiptoe rather than jump into the sector.
That's because much of the 15.7% increase in new home construction in July, the first gain in two months, came from apartment buildings, which tend to attract lower income renters and do not generate as much overall economic activity as single-family homes.
The appeal of apartments to millennials, a generation laden with student loan debt that may make it difficult to afford a down payment on a home, is one reason why some noted investors, such as DoubleLine Capital's Jeffrey Gundlach, have said they are betting against the shares of homebuilding companies.
Fannie Mae on Monday downgraded its outlook for home sales and construction, estimating that 1.4 million single-family units will be constructed during 2014 and 2015 combined, compared with an earlier forecast of 1.6 million units.
"From an investment standpoint the homebuilder trade has been one of the most hotly anticipated trades over the past few years. Yet it continues to be nothing spectacular," says James Liu, a global market strategist at J.P. Morgan Funds.
Fund managers, as a whole, are not taking a rosy view of the homebuilding segment. Actively managed U.S. mutual funds, on average, devote just 1.06% of their portfolio to companies such as Toll Brothers and KB Home , according to Lipper. That was unchanged from the end of 2013.
Yet analysts and strategists say there are some attractive pockets of the housing market.
Phil Orlando, chief equity strategist at Federated Investors, built up positions in select retail stocks throughout the summer in expectation that a slowly improving housing market would help retailers such as Home Depot and apparel and home fashion company TJX , parent of TJ Maxx and HomeGoods.
Both companies should benefit not just from new home construction, which accounts for approximately 8% of the housing market, but from rising home prices, which could spur homeowners to upgrade their appliances or otherwise put more money into their homes, he says.
"I'm very comfortable that when the dust settles we will see a resurgent consumer in the back-to-school season," he says.
Home Depot on Tuesday reported a higher-than-expected 6.4% increase in same-store sales in the United States and raised its full-year forecast. Shares of the company are up nearly 8% for the year, or nearly one percentage point more than the broad S&P 500 index.
To be sure, some investors have already done very well betting on a 2014 multi-family housing market. Exchange-traded funds focusing on residential real estate investment trusts, which typically hold apartment buildings and other multi-family developments, have been on a tear this year. The iShares Residential Real Estate Capped ETF is up 22.3% year-to-date, while the Vanguard REIT ETF is up 17.6%.
Those gains raise the possibility that shares of the companies in the multi-family sector already reflect the boom in apartment buildings and have little room to run, analysts say.
"The data remains inconclusive and uneven, says Dan Veru, chief investment officer at Palisade Capital, "and that's the nature of the housing recovery right now."