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Homebuilding ETFs: Before & After Coronavirus

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Very recently, the Fed notified that the current coronavirus-related economic downturn is totally different from those that we faced before. Fed Chair Jerome Powell in a speech said, “earlier in the post–World War II period, recessions were sometimes linked to a cycle of high inflation followed by Fed tightening.”

But since the financial crisis in 2008, rates have remained only low. Years of low rates “have brought a series of long expansions, often accompanied by the buildup of imbalances over time — asset prices that reached unsupportable levels, for instance, or important sectors of the economy, such as housing, that boomed unsustainably.”

Yes, the housing boom has been one of the most notable ones in the recent decade. iShares U.S. Home Construction ETF (ITB - Free Report) , returned about 134% since the start of 2008. This was against the 154% gains noticed in SPDR S&P 500 ETF Trust (SPY).

Inside Trends of Home Prices & Sales Volume

Shortage of labor, land and inventory caused a spike in home prices in all these years. Zillow Home Value Index for the United States has jumped to $248K for March 2021 from the recent low of $161K in November 2011, indicating a 54% jump in the index.

Still, the coronavirus crisis is likely to cause the price to decline 2-3% a by the end of 2021, per Zillow Group, which estimated that U.S. GDP will decline 4.9% this year and increase 5.7% next year. The decline in economic growth will also cause home sales to drop up to 60% when compared to pre-coronavirus levels (read: Is it a Bad Time to Invest in Housing ETFs Now? Let's Find Out).

However, sales volume is expected to experience a slightly faster pickup than prices, showing signs of recovery by the end of June 2020, per Zillow. The research group also “expects much more short-term disruption than longer-term."

On the other hand, another group Realtor.com expects home sales in the United States to rebound in late summer and early fall as fears of coronavirus begin to cool down, before experiencing a slump again later in the year. Real estate brokerage Redfin too appears optimistic. Home-buying demand has come back with force, now 5.5% higher than it was pre-pandemic, per Redfin. Inventory is down 24%.

That said, extremely low levels of mortgage rates should facilitate some affordability. Realtor.com predicts that mortgage rates will drop to new record lows — below 3% — by the end of 2020. Confidence among U.S. single-family homebuilders rose in May.

Credit Conditions of the Sector Players

Investors should note that due to the Fed’s plan to buy corporate bonds this year, there has been a surge in debt issuances among American companies of late.

So, credit ratings of the housing company's proposed senior unsecured note offerings can act as a guidance for the sector’s wellbeing. Fitch Ratings recently affirmed a Stable outlook to NVR (NVR - Free Report) and D.R. Horton’s (DHI - Free Report) proposed debt offering. Both have received BBB+ and BBB rating, respectively, indicating decent credit conditions.

 Overall, debt-equity ratio of the sector stands at 0.50x versus for the S&P 500-based ETF SPY’s 0.75x. Current ratio of the industry stands at 4.63x versus 1.27x of IVV, meaning the sector is well-positioned in meeting short-term liquidity need. 

ETFs in Focus

ITB and SPDR S&P Homebuilders ETF (XHB - Free Report) are two ETFs that should be followed amid the ongoing volatility in the market. The sector is undervalued at the current level with forward P/E ratio of 9.27x versus 19.13x possessed by (IVV - Free Report) .

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