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Will Housing ETFs Gain from a Sales Boon or Suffer on Trump Woes?

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Existing home sales, which make up the major portion of U.S. home sales, were back with a bang in January to reach a 10-year high. Buyers brushed aside fears of rising rates in the face of Fed policy tightening, which is likely to speed up this year, as well as higher home prices.

Existing home sales in January were up 3.3% sequentially and 3.8% year over year to a seasonally adjusted annual rate of 5.69 million units, following a downwardly revised 5.51 million units in the previous month. Sales surpassed market expectations of 5540 thousand units. Probably, the risk of faster rises in rates pushed potential buyers to enter into the market.

Investors should note that existing home sales rose for three months in a row before falling in December. This along with rising rate expectations probably took the sector to the bottom 26% segment of the Zacks Industry Universe.

Higher mortgage rates, thanks to the Fed’s policy tightening stance, and Trump’s promise of fiscal reflation and increasing home prices mainly due to record low inventories led to the lower industry rank. Homes available for sale dropped 7.1% compared with the year- ago period despite a steep price hike (up 7.1%) (read: Yellen Hints at Faster Rate Hikes: 4 ETFs to the Rescue).

Are There Any Downside Risks Ahead?

The latest data indicate that a solid labor market is actually keeping the housing market steady, though high prices are still an obstacle. Also, Trump and Fed are responsible for a recent uptick in bond yields, which made mortgage payments costlier (read: Why Are Active Fixed Income ETFs Flushing the Market?).

As per CNBC, the 30-year fixed mortgage rate, which has cooled down lately after shooting up in recent times, still hovers above 4%. On the other hand, annual wage growth is below 3%, which will make it difficult for buyers to pay the higher mortgage rates.

Rates may be on a sharp uptrend if the Fed opts for a faster rate hike this year, citing a pickup in economy, inflation and the job market. As per some analysts, rates may inch up to about 5% by this year end.

Secondly, President Trump’s policies toward immigrants can also be an overhang on the sector. Investors should note that tight home supplies are due to lack of skilled labor and lands. With Trump’s intended clampdown on undocumented immigrants, the sector is likely to be hit hard. This is because of the fact that construction sites employ several undocumented labors.

As per the source, homebuilders like Lennar and Toll Brothers are facing this labor shortage issue, which is weighing on their speed of construction. Recruiting Americans may lead to escalating costs for these companies. In any case, average hourly construction wages are at $28.42 per hour, up 3% over the previous year, marking the fastest clip of yearly increase since 2009.

ETF Impact

Whatever be the case, the negatives are yet to hit the market fully. Plus, we note that it is the start of the key spring selling season and the sector is likely to cross the present hurdles in the near term. Plus, several earnings reports also came in better in the latest reporting cycle (read: What Will Impact Housing ETFs: Strong Earnings or Soft Sales?).

In the last five days (as of February 22, 2017), housing ETFs have done well. These funds include SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares U.S. Home Construction ETF (ITB - Free Report) and PowerShares Dynamic Building & Construction Fund (PKB - Free Report) . So, investors can play the upbeat existing home sales data via these ETFs (see all industrial ETFs here).

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