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Housing ETFs to Gain Despite a Dip in New Home Sales: Here's Why

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U.S. new-home sales dropped in June for the first time since February. In June 2023, the sales of new single-family houses in the United States experienced a 2.5% decline, reaching a seasonally adjusted annualized rate of 697,000. This was in contrast to May's figure, which marked a 15-month high at 715, 000 and also fell below the market consensus of 725,000.

The Western region saw a significant decrease in sales, plunging 13.9%, while the Midwest region witnessed a sharp decline of 28.4%. In contrast, the Southern region showed a positive trend, with sales increasing by 4.3%. Similarly, the Northeast region experienced a strong surge of 20.6%.

The median price of new houses sold in the United States was $415,400, while the average sales price stood at $494,700. This is in comparison to the prices a year ago, which were $432,700 and $472,000, respectively. As of the end of June, there were 432 thousand houses left to be sold, indicating a supply sufficient for 7.4 months at the current sales rate.

Will Homebuilding ETFs At All Face Pressure in Near Term?

SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares U.S. Home Construction ETF (ITB - Free Report) added about 7.7% and 8.8% past month, respectively, outperforming the broader market. While the fall in new home sales is a negative for the space, we do not expect the space to underperform so fast. The current selling pace still points at steady demand for new properties, per Bloomberg (read: 5 ETF Winners of 1H23 With More Upside Left).

Dirt Cheap Valuation of Homebuilding ETFs

Investors should note that the housing ETFs are available at dirt-cheap valuation which will support the further rally in these ETFs. The broader market ETF SPDR S&P 500 ETF Trust (SPY - Free Report) has a P/E of 17.86X. Meanwhile, ITB has a P/E of 7.60X even after 46.6% gains in this fund this year. The fund XHB has a P/E of 12.20X even after 39.4% year-to-date return. These funds underperformed last year, which helped the duo rally hard this year amid favorable operating environment. Both ETFs, ITB and XHB, have a Zacks Rank #2 (Buy).

Home Price Gains Coming to an End?

Though the Fed rate hikes may bode ill for the space to some extent, U.S. short-term rates are also nearing its peak. Home prices, though are rising steadily, Robert Shiller, Yale University professor of economics and Case-Shiller Index co-founder, recently said that more-than-a-decade of steady gains in U.S. home prices may be coming to an end, per CNBC.

Home prices in May rose for four months in a row per the S&P CoreLogic Case-Shiller home price index. Prices nationally rose 0.7% sequentially in May. However, prices nationally were down 0.5% year over year. “Home prices in the U.S. began to fall after June 2022, and May’s data bolster the case that the final month of the decline was January 2023,” said Craig Lazzara, managing director at the S&P DJI, as quoted on CNBC.

Though prices have registered an uptick lately, “the breadth and strength of May’s report are consistent with an optimistic view of future months,” per Lazzara. Prices are rising again due to low inventory. After all, demand resumed after the initial surged in mortgage rates, as buyers became used to a new normal interest rate environment.  

 


 


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