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6 Reasons Why Homebuilding ETFs Are a Strong Buy

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The U.S. housing market was hit hard initially amid the coronavirus-led lockdown. In any case, the space was struggling with land and labor shortage as well as higher prices. The coronavirus outbreak made matters worse. However, things are looking up lately.

The U.S. homebuilding and building products sector has put up a better-than-expected second-quarter performance, per Fitch Ratings. Fitch has boosted revenue and EBITDA estimates for most rated homebuilders and building products issuers due to much stronger second-quarter results than initially expected.  

Fitch now projects total housing starts and new home sales to fall 8.6% and 5.7%, respectively, this year, compared with its April forecast of a 25% and 20% decline. Net orders remained robust in the second quarter while homebuilders’ confidence remains upbeat.

Sales & Prices Shooting Up

Existing home sales (90% of the U.S. housing market) jumped by a record 24.7% sequentially in July with prices hitting an all-time high, according to the National Association of Realtors (NAR). This marked the second consecutive month of double-digit percentage sales gains.

Higher demand and a constantly low inventory of available homes have pushed up the median home price in the United States to $304,100, the highest price ever – both in nominal terms and when adjusting for inflation. The median price is up 8.5% from a year ago and marks 101 consecutive months of year-over-year gains, as per a CNN article.

Still-Low Mortgage Rates 

Mortgage rates have been on the rise for the second consecutive week to mark the second increase in four weeks. The 30-year fixed rates rose by 3 basis points to 2.99% in the week ending Aug 20. Compared to this time last year, 30-year fixed rates were down by 56 basis points. 30-year fixed rates were also down by 195 basis points since November 2018’s most recent peak of 4.94%, per an article published on Yahoo Finance. The U.S. mortgage rates remained at sub-3% level, supporting home buyers. Rock-bottom interest rates caused by the Fed have led the mortgage rate to hover around such low levels.

Post-Pandemic “Suburban Revival”

According to Alex Pettee, president, director of Research & ETFs, Hoya Capital Real Estate, a potential post-pandemic “suburban revival” would boost home buying. The coronavirus outbreak has made the work-from-home option a big hit. Companies now will likely be offering the option permanently with more ease. So many people are now moving to suburban areas to avoid high expenses involved in a dense and expensive city. Suburban areas offer more affordable homes.

Millennial-Led Demographics

Investors should note that millennials have overtaken baby boomers in the U.S. population. In 2020, millennials are expected to buy the majority of real estate in the United States, per a report from Realtor.com, quoted on a CNBC report issued in February.

“Realtor.com predicts that millennials’ share of mortgage originations will surpass an unprecedented 50% in the spring, outnumbering the share of total homes purchased by members of Generation X and baby boomers, at a respective 32% and 17%.” Though the COVID-19 outbreak stalled the momentum at the start of spring, pent-up demand from millennials should be realized now with record-low rates.

Decent Financial Position of Builders

Overall, debt-to-equity ratio of the sector stands at 0.46X versus 0.76X for the S&P 500-based ETF IVV. Current ratio of the industry stands at 4.02X versus 1.33X of IVV, meaning the sector is well positioned in meeting short-term liquidity needs.

Compelling Valuation  

Valuation-wise too, the sector looks lucrative. Forward P/E ratio of the sector stands at 11.88X versus 21.51X of IVV. The PEG ratio of the sector stands at 1.42X versus 3.03X of IVV. Projected EPS growth of the sector is 10.04% versus negative 5.85% of IVV. Historical EPS growth of the sector is 21.30% versus 10.44% of IVV.

ETF Plays

Most of the stocks of the housing industry have a Zacks Rank #1 (Strong Buy). Among the ETF plays, investors may find the below-mentioned options lucrative.

iShares U.S. Home Construction ETF (ITB - Free Report) – Up 3.98% Past Month

SPDR S&P Homebuilders ETF (XHB - Free Report) – Up 4.93% Past Month

Hoya Capital Housing ETF (HOMZ - Free Report) – Up 5.48% Past Month

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