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Should You Buy Housing ETFs On Falling Prices?

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The U.S. housing sector has long been struggling with higher home prices. But in surprise to buyers, home prices dropped 0.77% from June to July, the first monthly decline in nearly three years, according to Black Knight, a mortgage software, data and analytics firm, as quoted on CNBC.

The decline was the largest single-month decline in prices since January 2011. It is also the second-worst July performance dating back to 1991. “Further price corrections are likely on the horizon as we move into what are typically more neutral seasonal months for the housing market,” said a Black Knight executive, quoted on CNBC.

Prices historically increase on average 0.4% between June and July, because the market is heavily weighted towards families buying larger, more pricey homes. Even during the Great Recession home prices typically jumped marginally from March through May, due to the seasonality of the market. But housing market has been depressive of late.

Despite higher costs for land, labor and materials, about 1 in 5 builders in August reported a decline in prices in the past month to boost sales or limit cancellations. The average drop in home prices reported was 5%.

U.S. homebuilding declined to the lowest level in nearly 1-1/2 years in July, indicating the housing market could shrink further in the third quarter. Housing starts nosedived 9.6% to a seasonally adjusted annual rate of 1.446 million units last month, the lowest level since February 2021. Economists polled by Reuters had forecast starts declining to a rate of 1.540 million units, as quoted on Reuters.

Any Silver Lining?

“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months,” Dietz said, as quoted on CNBC.

Inflation in the United States moderated slightly as energy and gasoline prices dropped. This is especially true as the consumer price index (“CPI”) jumped 8.5% year over year in July, down from a 9.1% year-over-year increase in June, which was the fastest increase since November 1981. The producer price index (PPI) showed prices fell 0.5% sequentially compared to expectations of a 0.2% increase. If this decline continues for longer, construction costs may come down.

If inflation continues to fall, the Fed might go slow on the rate hike front. This, in turn, may lower mortgage rates, thereby enticing buyers. Benchmark U.S. treasury yield remained subdued in recent days. As of Aug 23, 2022, benchmark U.S. treasury yield was 3.05% versus 3.35% yield seen for the three-year notes. Such decline in long-term U.S. treasury yields is a plus for the homebuilding stocks.

Home prices were still 14.3% higher year over year in July, which is more than three times the historical annual price growth (per CNBC), but the majority of that jump happened in the first five months of 2022, before the shoot-up in mortgage interest rates tool place.

ETFs in Focus

Against this backdrop, below we highlight a few housing ETFs investors may want to keep a close tab on.

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

The underlying Dow Jones U.S. Select Home Builders Index is a subset of the Dow Jones U.S. Household Goods Index. It is a free-float adjusted market capitalization-weighted index. It measures the performance of the home construction sector of the U.S. equity market. The fund charges 41 bps in fees.

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

The underlying S&P Homebuilders Select Industry Index represents the homebuilding sub-industry portion of the S&P Total Markets Index. The S&P TMI tracks all the US common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Homebuilders Index is a modified equal weight index. The fund charges 35 bps in fees.

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

The underlying Dynamic Building & Construction Intellidex Index is comprised of stocks of U.S. building and construction companies. The Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. The fund charges 60 bps in fees.

Hoya Capital Housing ETF (HOMZ - Free Report)

The underlying Hoya Capital Housing 100 Index is designed to track total spending on housing and housing-related services across the United States. The fund charges 30 bps in fees.

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