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Guide to Homebuilding ETFs

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The U.S. housing market has been in the pink over the past few months despite the ongoing coronavirus crisis. The favorable operating backdrop and upbeat earnings have been propelling the space. The sales scenario has been robust. Existing homes account for the majority of home sales in the United States, where sales touched the highest level in 13 years. However, new home sales have been a bit suppressed as it increased in December for the first time since July.

Against this backdrop, below we highlight the strength, weakness, outlook and the ETF investment options of the U.S. housing industry.

Tailwinds

Overall Demand Remains Strong

Demand in the space remained strong even in the pandemic-stricken 2020 despite high home prices. Notably, record-low mortgage rates amid a super dovish Fed drove demand. Per the latest data, existing home sales jumped 0.6% in January 2021 to a seasonally adjusted annual rate of 6.69 million units after increasing 0.9% in December. On a year-over-year basis, existing home sales jumped 23.7% in January. A gauge of prospective buyer traffic rose 4 points to 72 in February.

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 is a big hit. Companies now will likely be offering the option permanently with more ease; so many are now moving to suburban areas to avoid high expenses needed to incur 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 U.S. population. In 2020, millennials are expected to have bought the majority of real estate in the United States, going by a report from Realtor.com that was published in early February 2020, quoted on CNBC.

“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 had stalled the momentum at the start of spring 2020, pent-up demand from millennials should have been realized in the months ahead with extreme low rates.

Home Listing to Go Up Ahead

The housing market has been struggling with low inventory for quite some time. Last fall, Zillow research indicated that COVID-19 uncertainty was keeping some potential sellers from listing their homes, depressing inventory. With growing vaccination, sentiments improved among sellers. 

Headwinds

Steadily Rising Home Prices

One factor that can hurt the home sales momentum is rising home prices. The typical seasonally adjusted value of homes in the United States is currently $269,039. This value only includes the middle price tier of homes. Values have gone up 9.1% over the past year and Zillow predicts that they will jump 10.1% next year.

Rates Will Be on the Rise in 2021

Vaccination will strengthen bets over a sooner-than-expected return to normalcy. This, in turn, will boost economic growth forecasts as well as inflationary expectations, driving long-term treasury yields. The 30-year mortgage rates already reached 3.000% on Feb 23, 2021, for the first time in 143 days.  Mortgage applications dropped 5.1% from the previous week, according to data from the Mortgage Bankers Association's (MBA) survey for the week ending Feb 12, 2021. Applications to refinance a home loan declined 5%, while mortgage applications to purchase a home dropped 6%.

Rise in Construction Costs

Material prices have been on the rise lately, thereby resulting in higher construction costs. Among many other items, lumber prices remained at a record high level. This even caused some builders to suddenly halt projects in February. So, affordability will be an issue in 2021 amid rising costs and interest rates. A gauge of builder expectations for the next six months dropped to a six-month low of 80.

ETFs in Focus

In such a background, here are a few housing ETFs that investors may choose to play/avoid depending on market conditions.

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 $2.19 billion, it holds a basket of 46 stocks, heavily focused on the top two firms – D R Horton (13.99%) and Lennar (12.75%). The product charges 42 basis points (bps) in annual fees.

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. Johnson Controls International (4.56%), Williams-Sonoma (4.55%) and Lennar Corp. (4.37%) are the top three spots in the fund. It has an AUM of $1.38 billion. The fund charges 35 bps in annual fees (read: Housing ETFs to Play D.R. Horton Q1 Earnings Beat & Fed Help).

Hoya Capital Housing ETF (HOMZ - Free Report)

The fund seeks to provide investment results that before fees and expenses correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based index designed to track the 100 companies that collectively represent the performance of the U.S. housing industry.

The fund does not have company-specific concentration risks with no stock accounting for more than 2.91% of the basket. It has an AUM of $60.8 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of 31 stocks, each accounting for less than 5.44% share. Martin Marietta Materials (5.43%), Vulcan Materials (5.09%) and Lennar (4.97%) are the top three holdings of the fund. It has amassed assets worth $217.6 million. The expense ratio is 0.59% (read: Infrastructure ETFs & Stocks Up for a Rally in Biden Era).

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