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ETFs to Shine on Record U.S. Homebuilder Confidence in August

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The latest data on the U.S. housing market looks encouraging even as the number of coronavirus cases continues to spike in the United States. Per the monthly National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (“HMI”), builder confidence for newly-built single-family homes surged to 78 points in August from 72 in July, 58 in June, 37 in May and 30 in April (the lowest since June 2012). The metric also surpassed analysts’ expectations of the reading to rise to 73, per a Reuters’ poll. Going on, August’s reading was the highest in the 35-year long history of the index, matching the December 1998 record. Notably, any reading above 50 is considered positive and signals at improving confidence.

Notably, all three components of the index have gained. The current sales conditions came in at 84 compared with 78 in July, buyer traffic surged to the highest-ever level at 65 from 57 last month and sales expectations rose to 78 in August from 75 in the prior month, per the NAHB press release. The monthly averages regional HMI scores in the Northeast spiked 20 points to 65. Moreover, the South index rose 12 points to 71. Moreover, the Western index jumped 15 points to 78, with the Midwest rising 13 points to 63, per the release.

NAHB Chief Economist Robert Dietz has commented that, “single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets,” per the NAHB press release.

Current Housing Market Conditions

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Notably, the S&P Homebuilders Select Industry Index reached a record high for the first time in 15 years, having gained 13.2% this year and more than doubling from the low reached in late March.

Analysts believe that support from the Federal Reserve is helping keep rates at such low levels. Also, rising uncertainty related to the coronavirus outbreak is driving demand for safe-haven assets like U.S. Treasuries (per the Reuters article). This in turn will help drive consumer spending and demand in the housing market.

Meanwhile, rising lumber prices, which have more than doubled since mid-April, can lead to sluggishness in the housing market despite low interest rates. Also, low employment levels and fears of a second wave of coronavirus outbreak will continue to impede momentum of the U.S. housing market.

In this regard, NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Fla said that “however, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates,” per the NAHB press release.

Homebuilder ETFs That May Gain

Against this backdrop, investors can look at the following housing ETFs that might gain:

iShares U.S. Home Construction ETF (ITB - Free Report)  

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.06 billion, it holds a basket of 44 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: Wall Street's Best 100 Days Since 1933: ETF Winners).

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

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $1.13 billion. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

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

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 32 stocks in its basket, each accounting for less than a 5.33% share. It has amassed assets worth $126.8 million. The expense ratio is 0.60%. It is a Zacks #3 Ranked ETF, with a High-risk outlook (see: ETFs to Shine on Positive U.S. New Home Sales Data).

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