U.S. Housing Market Resilience: A Strategic Shift Toward Construction Stocks Over Diversified REITs

The U.S. housing market, long a barometer of economic health, remains in a state of cautious equilibrium as reflected in the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). In July 2025, the HMI edged up to 33, a modest one-point gain from June, marking the 15th consecutive month of sub-50 readings—a threshold that signals negative builder sentiment. While this slight improvement is noteworthy, the data underscores a market in transition: builders are cautiously optimistic about future demand but face immediate challenges, including affordability constraints, high interest rates, and a labor shortage. For investors, this duality creates a compelling case for sector rotation, favoring Construction and Engineering stocks over Diversified REITs.

The HMI's Mixed Signals: Policy Tailwinds vs. Persistent Headwinds

The NAHB HMI's July reading reveals a nuanced picture. The component measuring current sales conditions rose to 36, and future sales expectations climbed to 43, driven by the passage of the One Big Beautiful Bill Act. This legislation, hailed as a legislative win for households and builders, introduced tax incentives, expanded affordable housing programs, and injected capital into infrastructure projects. However, the traffic of prospective buyers—measured at 20—remained at a two-year low, signaling that affordability challenges persist.

Builder activity further highlights the tension in the market: 38% of builders cut prices in July, the highest rate since 2022, while 62% relied on sales incentives. These metrics reflect a sector propping up demand through artificial means rather than organic growth. Meanwhile, material costs—elevated by tariffs on steel, aluminum, and lumber—add to the pressure, with suppliers hiking prices by 6.3% on average.

Regionally, the HMI's disparity is stark. The Northeast and Midwest showed marginal gains (45 and 41, respectively), while the South and West dropped to 30 and 25. This geographic divergence underscores the uneven recovery, with high-cost regions like the West facing the most acute affordability challenges.

Construction and Engineering Stocks: Policy-Driven Opportunities

The One Big Beautiful Bill Act has created a favorable environment for Construction and Engineering stocks. The expansion of the Low-Income Housing Tax Credit (LIHTC) to 12% and the introduction of recurring Opportunity Zones (OZs) are expected to spur over one million new affordable housing units by 2035. This represents a direct tailwind for firms specializing in residential and infrastructure construction.

Moreover, government-funded initiatives under the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and CHIPS and Science Act are injecting $2.15 billion annually into projects like transportation, clean energy, and data centers. These programs are accelerating demand for specialized construction services, particularly in solar, wind, and battery storage sectors. For example, firms leveraging Building Information Modeling (BIM), AI, and automation—tools that address labor shortages and improve efficiency—are well-positioned to capture market share.

Private equity activity in the sector has also surged, with $14 billion in M&A deals between August 2023 and July 2024. This capital is flowing into companies with vertical and horizontal integration capabilities, particularly in renewable energy and infrastructure. For investors, the key is to identify firms that can scale projects and adapt to policy-driven demand.

Diversified REITs: Resilience Amid Uncertainty

Diversified REITs, which include residential, commercial, and industrial properties, have shown resilience in 2025. U.S. REITs raised $39.7 billion in capital through the first half of the year, with $25.2 billion in debt financing and $8.7 billion in equity. This access to capital has allowed REITs to maintain stable operations despite the housing market's challenges.

However, the NAHB HMI's continued sub-50 readings and the labor shortage—382,000 unfilled jobs per month—pose long-term risks. While the One Big Beautiful Bill Act may stabilize builder confidence, its impact on REIT performance remains indirect. For instance, the expansion of LIHTC could benefit affordable housing REITs but may not offset broader affordability issues in the commercial or industrial sectors.

Strategic Sector Rotation: Why Construction Outpaces REITs

The data reinforces a strategic shift toward Construction and Engineering stocks for several reasons:

1. Policy-Driven Demand: The One Big Beautiful Bill Act and IIJA/IRA programs are creating a pipeline of projects that require specialized construction expertise.
2. Technological Adoption: AI, robotics, and automation are transforming the sector, enabling firms to overcome labor shortages and improve margins.
3. Government Partnerships: Firms with contracts tied to infrastructure and clean energy projects are insulated from housing market volatility.

In contrast, Diversified REITs face a more uncertain outlook. While they benefit from disciplined balance sheets and capital access, their exposure to affordability challenges and high interest rates makes them a less attractive bet. For example, the average mortgage rate of 7% has suppressed buyer traffic, limiting demand for residential REITs.

Actionable Investment Strategies

For investors positioning for a resilient housing market, the following strategies are recommended:

1. Target Policy-Benefit Construction Firms: Prioritize companies with exposure to LIHTC, OZs, and government infrastructure programs. Examples include firms in solar/wind construction and modular housing.
2. Leverage Private Equity Partnerships: Invest in private equity-backed construction firms that are scaling through M&A and technological innovation.
3. Avoid Overexposure to REITs: While REITs remain stable, their growth potential is constrained by affordability issues and interest rate sensitivity. Allocate a smaller portion of portfolios to REITs with a focus on industrial or logistics assets, which are less tied to housing.

Conclusion: Building a Resilient Portfolio

The U.S. housing market is at a crossroads. While the NAHB HMI's modest improvement signals a tentative recovery, the path forward is shaped by policy, technology, and affordability challenges. For investors, the data points to a strategic shift in favor of Construction and Engineering stocks—those that can navigate high costs, leverage innovation, and benefit from government-driven projects. Diversified REITs, while resilient, face headwinds that make them a secondary play. By aligning portfolios with the forces driving construction innovation and policy tailwinds, investors can position for long-term value in a market poised for transformation.