U.S. homebuilding sector is showing signs of improvement. In any case, most ETFs from this sector have been hovering around an all-time high. Investors seeking to bet on the improving homebuilder trends could consider homebuilder ETFs —iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) ,SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) , and Invesco Building & Construction ETF (PKB Quick QuotePKB - Free Report) — which could be more compelling picks than a single stock.

The funds like ITB, XHB, and PKB are up 13.6%, 17.6% and 18.8% this year, outperforming 10.5% gains noticed in SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) . There is another ETF called Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - Free Report) which has added 5.5% this year. These products erase company-specific risks and offer a higher level of diversification while lowering volatility.

Let’s find out the drivers behind the sector’s strength.

Fed Sticks to Three Rate Cuts in 2024

The Federal Reserve decided to keep interest rates unchanged at its latest policy meeting, maintaining the benchmark rate in the range of 5.25-5.50%. No officials see rates going up in 2024. Meanwhile, despite previous expectations of a lesser number of rate cuts due to recently released hot inflation numbers, the Fed still anticipates the need for three rate cuts in 2024.

With housing sector performing well in a low-rate environment, the sector has now every reason to fare even better (read: Growth ETFs to Play as Fed Sticks to 3 Rate Cuts Projections).

February Sees Surge in Existing Home Sales Despite High Rates

In February, existing home sales in the United States jumped 9.5%, reaching an annualized rate of 4.38 million, according to the National Association of Realtors (NAR). This marked the largest monthly increase in a year. Economists polled by Reuters had forecast home resales would fall to a rate of 3.94 million units.

Despite mortgage rates approaching 7%, home sales continued to rise in February. This is a good indication for the market. The average rate on the 30-year fixed mortgage reached 6.94% by the end of February. It shows that buyers adjusted to this new normal as rates are unlikely to return to historically low levels.

The median home price also rose about 6%, hitting an all-time high for February. This marked the eighth successive month of year-over-year price gains. But increased sales despite high home prices is a positive indication for the business.

Spring Selling Season

The housing market, which has been performing decently, is entering a better spell. Winter months normally remain subdued for home building as the weather is too wet in the south and severely chilly in the north.

However, the housing market has now entered the key spring selling season, which is considered the peak time for home sellers. Normally, the season starts in March and lasts through May-June thanks to warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar starts

Improving Homebuilders’ Confidence

U.S. homebuilders are now feeling more confident than they have since last summer. This is especially true as the National Association of Home Builders/Wells Fargo Housing Market Index gained for the fourth straight month, rising 3 points in March 2024 to 51. This marks the highest level since July.

Inventory Increases

The number of homes available for sale rose 10.3% from the previous year. The increase in inventory offers more options for homebuyers, erasing some of the tightness in the market.

Any Wall of Worry?

Challenges for First-Time Homebuyers

First-time homebuyers faced challenges due to higher prices and increased competition from repeat buyers. Cash transactions made up significant portion of sales, while first-time buyers accounted for only 26% of sales. Entry-level homes still remained scarce in the market.