Unlocking Sector Rotation Opportunities: Construction vs. Consumer Staples in a Shifting Housing Market

The U.S. housing market is at a pivotal inflection point. A 1.2% month-over-month (MoM) increase in existing home sales in October 2025, the highest in eight months, signals a subtle but meaningful shift in market dynamics. While the 4.10 million annualized sales rate remains below pre-pandemic levels, this uptick—coupled with declining mortgage rates and improving inventory—suggests a gradual normalization of buyer-seller dynamics. For investors, this data offers a critical lens through which to reassess sector allocations, particularly between construction and consumer staples.

Market Dynamics: A Tipping Point?

The October 2025 data reveals a nuanced picture. Mortgage rates, now at 6.25% for the 30-year fixed loan, have fallen nearly 25 basis points since the start of the year, making affordability more attractive. Meanwhile, active listings have grown by 20.9% year-over-year, with the national months of supply reaching 4.4—a balanced market by historical standards. However, regional disparities persist: the Midwest and South, with their lower prices and ample inventory, are outpacing the Northeast and West, where high prices and limited supply continue to stifle demand.

The 1.2% MoM increase in sales is not just a statistical blip. It reflects a broader trend: buyers are cautiously re-entering the market as affordability improves and sellers adjust to softer demand. This shift is particularly evident in first-time buyer activity, which rose to 32% of transactions in October, up from 27% a year earlier. For investors, this signals a potential rebalancing of the housing market—and with it, a reallocation of capital between sectors.

Sector Rotation: Construction vs. Consumer Staples

Historical data from 2020 to 2025 reveals a clear divergence between construction and consumer staples. During periods of strong home sales, construction-related sectors (materials, industrials) have historically outperformed, while consumer staples have acted as a defensive haven during downturns.

In 2022, the rollout of the Bipartisan Infrastructure Law and a surge in homebuilding activity propelled construction ETFs like ITB and XHB to double-digit gains. Conversely, consumer staples underperformed during this period, as households shifted spending toward housing and infrastructure. By 2025, however, the narrative reversed: as home sales slowed and affordability challenges persisted, staples like groceries and health products saw resilient demand, with sales growing 5–6% year-over-year.

The October 2025 data suggests a reversal of this trend. With mortgage rates falling and inventory improving, construction-related sectors are poised to benefit. The U-6 unemployment rate, which dropped to 8.3% in July 2025, further supports this view. Historical patterns show that when U-6 declines by more than 0.5% quarter-over-quarter, construction and energy sectors outperform the S&P 500 by an average of 12% annually, while consumer staples underperform by 3%.

Strategic Allocation: Overweight Construction, Underweight Staples

For investors, the case for overweighting construction is compelling. The sector's cyclical nature aligns with the housing market's gradual normalization. Key beneficiaries include:
- Homebuilders and construction materials firms: Companies like Lennar (LEN) and PulteGroup (PHM) are positioned to capitalize on rising demand for new homes.
- Infrastructure-related ETFs: ITB and XHB have gained 9% year-to-date in 2025, reflecting renewed investor confidence.
- Energy and industrial materials: As construction activity picks up, demand for steel, lumber, and cement is likely to rise.

Conversely, consumer staples, while defensive, face headwinds in a tightening labor market. With wage growth outpacing home price gains and first-time buyers entering the market, staples may see reduced discretionary spending. ETFs like XLP, which have underperformed by 13.9% in 2024, may struggle to outperform in a pro-growth environment.

Risks and Considerations

While the case for construction is strong, investors must remain cautious. Regional imbalances—such as the West's 26.7% inventory growth versus the Northeast's 14.2%—highlight the need for localized analysis. Additionally, trade policy uncertainties and potential rate hikes could dampen momentum. For staples, the sector's stability may still appeal to risk-averse investors, particularly in a volatile macroeconomic environment.

Conclusion: Positioning for a Balanced Market

The 1.2% MoM increase in existing home sales is more than a statistical anomaly—it's a harbinger of a shifting market. As affordability improves and inventory grows, construction-related sectors are set to outperform, while consumer staples may lag in a pro-growth environment. By overweighting construction and underweighting staples, investors can align their portfolios with the evolving dynamics of the housing market.

In a world where sector rotation is king, the data is clear: the construction sector is building momentum, and the time to act is now.