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Here's Why Housing ETFs Are Up in 2023 Despite Soft Sales
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Existing home sales in the United States that include completed transactions of single-family homes, town homes, condominiums and co-ops, dropped 1.5% to a seasonally adjusted annual rate of 4.02 million in December 2022, slightly above the market forecast of 3.96 million.
Existing home sales fell for the 11th consecutive month in December, the longest stretch since 1999, and the lowest level since November 2010, due to limited availability of homes, high home prices and high mortgage rates. Total sales for the year were down 17.8% from 2021.
Still, iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) added 7.7% and 6% this year, respectively (as of Jan 20, 2023).
What Drove Homebuilding ETFs?
Mortgage rates have declined a full percentage point since their high last October. A fall in rates on expectations that the Fed may slow down its rate hike pace in 2023 bode well for housing ETFs. However, rates are still almost double from the year-ago level. All-cash sales increased to 28% of transactions from 23% the year before, per CNBC.
Per Lawrence Yun, chief economist for the Realtors, “[we] expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year,” as quoted on CNBC. Sales of homes priced above $1 million were down 45% year over year, compared with sales of homes priced between $250,000 and $500,000, which were down 34%. Yun suggested that weakness on the higher end may be due to volatility in the stock market.
What Lies Ahead?
The housing market should improve in 2023 due to the following reasons. Let’s highlight:
Rise in Rates to Cool Down in 2023
The Fed is likely to slow down the pace of rate hikes as inflation is showing signs of cooling. Plus, recessionary fears may keep long-term rates at a subdued level. These factors should pull down mortgage rates and favor demand for homes.
Stocks to Fare Better in 2023
Wall Street faced disaster in 2022 due to rising rates. But stocks are likely to rebound in 2023 (though with volatility). If the stock market ascent is maintained, a wealth effect will be realized. Big gains in people's investment portfolios can make them feel more secure about their wealth and their spending on higher-end homes.
Changes in Rents Almost Equal to Changes in Home Prices
The year-over-year change in typical rent in December 2022 was -0.3% sequentially, while the change in typical home value from last month is -0.2%, per Zillow Research. As changes in rent are slightly lower than changes in home prices, people would definitely want to go for ownership. However, home prices are still higher year over year. So, a material decline in mortgage rates is necessary for people to go for ownership.
ETFs in Focus
Against this backdrop, investors may want to keep track of homebuilding ETFs like iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) and Hoya Capital Housing ETF (HOMZ - Free Report) .
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Here's Why Housing ETFs Are Up in 2023 Despite Soft Sales
Existing home sales in the United States that include completed transactions of single-family homes, town homes, condominiums and co-ops, dropped 1.5% to a seasonally adjusted annual rate of 4.02 million in December 2022, slightly above the market forecast of 3.96 million.
Existing home sales fell for the 11th consecutive month in December, the longest stretch since 1999, and the lowest level since November 2010, due to limited availability of homes, high home prices and high mortgage rates. Total sales for the year were down 17.8% from 2021.
Still, iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) added 7.7% and 6% this year, respectively (as of Jan 20, 2023).
What Drove Homebuilding ETFs?
Mortgage rates have declined a full percentage point since their high last October. A fall in rates on expectations that the Fed may slow down its rate hike pace in 2023 bode well for housing ETFs. However, rates are still almost double from the year-ago level. All-cash sales increased to 28% of transactions from 23% the year before, per CNBC.
Per Lawrence Yun, chief economist for the Realtors, “[we] expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year,” as quoted on CNBC. Sales of homes priced above $1 million were down 45% year over year, compared with sales of homes priced between $250,000 and $500,000, which were down 34%. Yun suggested that weakness on the higher end may be due to volatility in the stock market.
What Lies Ahead?
The housing market should improve in 2023 due to the following reasons. Let’s highlight:
Rise in Rates to Cool Down in 2023
The Fed is likely to slow down the pace of rate hikes as inflation is showing signs of cooling. Plus, recessionary fears may keep long-term rates at a subdued level. These factors should pull down mortgage rates and favor demand for homes.
Stocks to Fare Better in 2023
Wall Street faced disaster in 2022 due to rising rates. But stocks are likely to rebound in 2023 (though with volatility). If the stock market ascent is maintained, a wealth effect will be realized. Big gains in people's investment portfolios can make them feel more secure about their wealth and their spending on higher-end homes.
Changes in Rents Almost Equal to Changes in Home Prices
The year-over-year change in typical rent in December 2022 was -0.3% sequentially, while the change in typical home value from last month is -0.2%, per Zillow Research. As changes in rent are slightly lower than changes in home prices, people would definitely want to go for ownership. However, home prices are still higher year over year. So, a material decline in mortgage rates is necessary for people to go for ownership.
ETFs in Focus
Against this backdrop, investors may want to keep track of homebuilding ETFs like iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) and Hoya Capital Housing ETF (HOMZ - Free Report) .