The beleaguered housing market is finally showing some signs of life. Though the plunging mercury levels undoubtedly played a spoilsport for the sector in the past quarter, shortage of skilled labor, rising cost of materials and higher mortgage prices also took the blame.
This time around the sector has divulged some encouraging numbers. New home sales for April, as reported by the Commerce Department, rose 6.4% from March, representing an increase of 433,000 at an annualized pace. Though sales are still down 4.2% as compared to the prior year, nonetheless it marks an improvement from the previous month.
Also, per National Association of Realtors (the NAR), total existing home sales have jumped 1.3% (SAAR) to 4.65 million in April from 4.59 million in March.
Moreover, builders are accelerating construction on new homes. In fact, new project starts have increased by 13.2% in April as compared to the prior month. The interesting point is that both multi-family homes and single-family homes have contributed to growth. Moreover, the rebound in starts has been felt in all four geographic areas (read: Are Housing ETFs in Trouble?).
Building permits, a gauge of future construction, has also bucked the previous trend. After declining for four times in the past five months, building permits grew 8% in April from the month earlier. However, the homebuilder confidence for new-single family homes, as indicated by the National Association of Home Builders, fell to 47 in May from 46 in April, the lowest level in 12 months. Tight credit conditions, heavy student loan debt and difficult labor market conditions seem to be keeping first time homebuyers away.
However, the builders’ expectations for the next six months have improved, indicating some light at the end of the tunnel. Moreover, the uptick in permits shows that we can expect gains in construction activities over the spring and summer months.
Also, the pace of increase in prices is cooling. The median sales price for existing homes was $201,700 in April up 5.2% year over year. However, median prices during Q1 were up 8.6% year over year.
Apart from the improving macro situation, homebuilders’ earnings were also not bad. Homebuilders like Lennar (LEN - Free Report) , D. R. Horton (DHI - Free Report) , KB Home (KBH) and Toll Brothers (TOL) have reported robust earnings for the first quarter of 2014 (read: Homebuilder ETFs in Focus on Mixed-Bag Earnings).
These encouraging data signal that the housing recovery might be on the verge of a rebound. The deputy chief economist at TD Securities in New York holds a similar view.
Major headwinds such as higher mortgage rates, steeper home prices as well as limited availability of land and workers had sidelined first time buyers, causing housing stocks to be laggards for the past few quarters.
However, with an improving job market, sales are expected to gradually move higher for the remaining part of the year. This is especially true given that the number of people seeking U.S. unemployment benefit has been showing a declining trend. Moreover, falling mortgage rates are expected to act as a catalyst for the housing market, says
Nobel Prize-winning economist and home-price expert Robert Shiller. The 30-year fixed mortgage rate has fallen below 4% for the first time since October last year.
Thus, lower mortgage rates, slower price growth and a gradually improving economy may lead to a recovery in the housing market (read: 3 Bond ETFs Surging as Interest Rates Tumble).
Homebuilder ETFs Springing Back
Given the recent set of encouraging data, homebuilder ETFs have easily managed to outpace the returns for the broad market fund SPDR S&P 500 (SPY).
This is especially true as all the three ETFs – SPDR S&P Homebuilders ETF(XHB - Free Report) , iShares U.S. Home Construction ETF (ITB - Free Report) and PowerShares Dynamic Building & Construction Fund (PKB - Free Report) – have gained in the band of 3% to 4% in the past one week. This compares favorably with a modest 1% gain for SPY.
Thus, for investors seeking to gain exposure in the above ETFs, we have briefly highlighted two of the top funds in the space. These could be great picks for those who believe that the housing market will take off in the coming months:
This ETF follows the S&P Homebuilders Select Industry Index, giving investors exposure to about 36 companies in the space. It manages about $1.7 billion in assets and trades in heavy volumes of little less than 5 million shares.
The fund uses an equal weight strategy so that no single security makes up more than 3.5% of assets, ensuring diversification benefits. From a sector look, building products and homebuilding make up nearly 55% of assets, while home furnishing retail and home furnishing also have double-digit exposure.
Though the product is down 5% since the start of the year, it has regained 3% in the past week (see: all the Industrial ETFs here).
This fund primarily focuses on the home construction sector by tracking the Dow Jones US Select Home Builders Index. The product has amassed an AUM of over $1.6 billion since inception.
ITB holds 34 stocks and is heavily concentrated in the top five holdings. Stocks like Lennar, D.R. Horton, PulteGroup (PHM) and Toll Brothers alone occupy a little under 40% of fund allocation.
Apart from the home construction sector which occupies two-thirds of fund assets, building materials & fixtures as well as home improvement retailers also have double-digit exposure.
The ETF has gained 4% in the past week, suggesting some strength in this pocket.
Moreover, both XHB and ITB have a favorable Zacks Rank of 3 or ‘Hold’ rating with High risk outlook, indicating that they have room for upside for the remaining part of the year but require patience for extreme volatility.
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