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Will the Rally in Homebuilder ETFs Continue?

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U.S. homebuilder ETFs struggled for the most part of 2018 with rising rates and escalating housing prices. Also, the land and labor shortages, resulting in tighter inventories, added to the concerns. Lately, the trend has reversed. The most-popular homebuilder ETF, iShares U.S. Home Construction ETF (ITB - Free Report) , has returned 8.3% over the past four weeks and 10.5% in the year-to-date frame (as of Jan 10) (see: all the Industrials ETFs here).

U.S. 30-year mortgage rates have dipped over the past two months as Fed officials have signaled that the central bank is likely to slow down or even halt rate hikes, given the signs of tightening financial conditions. For the week ended Jan 4, mortgage rates averaged 4.74% — marking their lowest level since April 2018. These helped applications for home mortgages jump at a more than three years pace(for the week ended Jan 4) (read: Dovish Fed Minutes Should Boost These ETFs).

The fall in mortgage rates also led to a surge in refinance activity, particularly for borrowers of larger loan size. The average loan size on refinance applications rose to the highest in the survey ($339,800) conducted by the Mortgage Bankers Association. The spike in refinance activity also pushed the refinance index to its highest level since July 2018.

However, the housing markets still have plenty of issues to cope with.

Government Shutdown

U.S. government shutdown which began on Dec 21, 2018 has affected the real estate industry. Per a survey conducted by the National Association of Realtors (NAR) on the government deadlock, 11% of the respondents have reported an impact on current clients and the same percentage of respondents have reported a possible impact on potential clients (read: Second-Longest Shutdown Puts These ETFs in Focus).

The report has suggested that some government employees are pulling out of purchase offers, while some are being denied loans due to the absence of wages. Also, some non-government employees are having second thoughts regarding purchases, given the overall concerns and uncertainty in the economy.

Lawrence Yun, the chief economist of NAR also didn’t seem pleased with the current government shutdown and reportedly said that the housing markets were already in a fragile state before the government closure. This was also reflected in the upward movement of mortgage rates, which were at their highest level since Dec 31(as of Jan 9).

Other Signs of Slowdown

In December 2018, Fannie Mae’s home purchase sentiment index fell to its lowest level in two years. Four out of 10 Americans said that “it’s a bad time to buy a home,” the highest on record since June 2010.

Also, per a separate data released last month, builders also have a bleak outlook on the housing sector. In December 2018, National Association of Home Builders/Wells Fargo Housing Market Index dropped to the lowest level since 2015.

ETFs in Focus

Though the recent dovish stance adopted by Fed officials and improved wage growth are tailwinds for the housing sector, government shutdown and escalating home prices will affect the sentiment of buyers.

So, homebuilder ETFs are likely to have a volatile ride in the coming weeks. Below we highlight them in detail:

ITB

This fund tracks the Dow Jones U.S. Select Home Construction Index comprising companies building residential homes, including manufacturers of mobile and prefabricated homes. There are a total of 48 holdings in the basket, with D.R. Horton Inc (DHI - Free Report) occupying the top weight of 13.6%. The fund’s AUM is $972.2 million and expense ratio is 0.43%. It currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Housing Market Facing Strong Headwinds: ETFs in Focus).

SPDR S&P Homebuilders ETF (XHB - Free Report)

This fund tracks the S&P Homebuilders Select Industry Index targeting industries like building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is an equal-weighted fund. It comprises 35 holdings and Lennar Corporation Class A (LEN - Free Report) occupies the top position with 4.8% weight. The fund’s AUM is $651.9 million and expense ratio is 0.35%. It has returned 8.7% in the year-to-date time frame and 5.9% over the past four weeks (as of Jan 10). The fund carries a Zacks ETF Rank #4 with a High risk outlook.

Invesco Dynamic Building & Construction ETF(PKB - Free Report)

This fund tacks the Dynamic Building & Construction Intellidex Index targeting companies providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines and airports. It comprises 30 holdings and NVR Inc (NVR - Free Report) (5.5%) is at the top. The fund’s AUM is $120.2 million and expense ratio is 0.58%. The fund has returned 6.4% in the year-to-date time frame and 3.1% over the past four weeks (as of Jan 10). It carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Pending Home Sales Fall in November: Homebuilder ETFs in Focus).

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