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Housing ETFs Up 20%+ YTD: Here's Why More Rally is Likely
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A resurgence of optimism has been seen in the homebuilder's market this year with SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares US Home Construction ETF (ITB - Free Report) adding more than 23% and 26% so far (as of Oct 2, 2023). These funds underperformed last year, which helped the duo rally hard this year amid favorable operating environment. Even after such stupendous rise, housing stocks and ETFs are primed for further rally. Here’s why.
Mortgage Rates to Decline in 2024?
Although the Fed is likely to enact one more rate hike of this year worth 25-bps in November, the U.S. central bank has hinted that the rates have peaked and we might see a slump in rates in 2024. The Fed might cut rates twice next year. This fact might lead to a decline in mortgage rates in the medium term – a tailwind for the housing industry.
Cheaper Valuation Despite a Huge Rally This Year
The homebuilding industry has forward P/E ratio of 8.10X versus 17.22X P/E possessed by the S&P 500. Price-to-Book ratio of the industry is 1.06X versus S&P 500’s 4.55X. Return-on Equity of the industry is 18.66X versus S&P 500’s 17.39X. Debt-to-Equity ratio of the industry is 0.21X versus the S&P 500’s 0.63X. Companies like D.R. Horton (DHI - Free Report) , KB Home (KBH - Free Report) and Lennar Corporation (LEN - Free Report) reported impressive earnings this reporting season with all companies beating earnings estimates.
Does Buffett's Approval Indicate Homebuilders' Value Proposition?
Warren Buffett's repute as an investment achiever is known to all. Investors worldwide pay close attention to his strategies. In the second quarter, Buffett’s company Berkshire Hathaway established positions in three new stocks: NVR (NVR - Free Report) , Lennar and D.R. Horton (read: Is It Time to Buy Homebuilding ETFs Following Warren Buffett?).
Buffett and his experienced portfolio managers possess a strong conviction in the potential of the industry as a whole. Buffett is a fan of value investing. Berkshire’s acquisition of three stocks despite a great rally this year is tell-tale sign of the remaining value quotient in the homebuilding space.
Return of Stable Traffic
In 2022, the Fed's aggressive measures against inflation led to a rapid rise in mortgage rates, causing a retreat of homebuyers. However, buyers seem to have accepted the increased borrowing costs this year and have returned to the market.
NAHB/Wells Fargo Traffic of Prospective Buyers is at a current level of 30.00. Though the figure is down from 35.00 last month and down from 31.00 one year ago, we expect a dip in yields and rising home construction (which would keep home prices at check) would supply more buyers to the market in the coming months. Moreover, to attract price-conscious buyers, many builders are offering rates much lower than the prevailing ones through their financing arms.
Improving Supply Chain
Another positive aspect for builders is an improving supply chain. With the decreasing costs of lumber (down 0.4% past month and up 2.5% in the past six months) and more available hiring options, some homebuilding companies, suggest that the issues regarding supply chain disruptions are largely behind them. Housing companies are thus on huge construction spree.
Bottom Line
The housing market is still undersupplied, especially in the entry-level and affordable segments, where many homebuilders are focusing their efforts. This means that there is still strong demand for new homes, especially from first-time buyers and millennials.
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Housing ETFs Up 20%+ YTD: Here's Why More Rally is Likely
A resurgence of optimism has been seen in the homebuilder's market this year with SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares US Home Construction ETF (ITB - Free Report) adding more than 23% and 26% so far (as of Oct 2, 2023). These funds underperformed last year, which helped the duo rally hard this year amid favorable operating environment. Even after such stupendous rise, housing stocks and ETFs are primed for further rally. Here’s why.
Mortgage Rates to Decline in 2024?
Although the Fed is likely to enact one more rate hike of this year worth 25-bps in November, the U.S. central bank has hinted that the rates have peaked and we might see a slump in rates in 2024. The Fed might cut rates twice next year. This fact might lead to a decline in mortgage rates in the medium term – a tailwind for the housing industry.
Cheaper Valuation Despite a Huge Rally This Year
The homebuilding industry has forward P/E ratio of 8.10X versus 17.22X P/E possessed by the S&P 500. Price-to-Book ratio of the industry is 1.06X versus S&P 500’s 4.55X. Return-on Equity of the industry is 18.66X versus S&P 500’s 17.39X. Debt-to-Equity ratio of the industry is 0.21X versus the S&P 500’s 0.63X. Companies like D.R. Horton (DHI - Free Report) , KB Home (KBH - Free Report) and Lennar Corporation (LEN - Free Report) reported impressive earnings this reporting season with all companies beating earnings estimates.
Does Buffett's Approval Indicate Homebuilders' Value Proposition?
Warren Buffett's repute as an investment achiever is known to all. Investors worldwide pay close attention to his strategies. In the second quarter, Buffett’s company Berkshire Hathaway established positions in three new stocks: NVR (NVR - Free Report) , Lennar and D.R. Horton (read: Is It Time to Buy Homebuilding ETFs Following Warren Buffett?).
Buffett and his experienced portfolio managers possess a strong conviction in the potential of the industry as a whole. Buffett is a fan of value investing. Berkshire’s acquisition of three stocks despite a great rally this year is tell-tale sign of the remaining value quotient in the homebuilding space.
Return of Stable Traffic
In 2022, the Fed's aggressive measures against inflation led to a rapid rise in mortgage rates, causing a retreat of homebuyers. However, buyers seem to have accepted the increased borrowing costs this year and have returned to the market.
NAHB/Wells Fargo Traffic of Prospective Buyers is at a current level of 30.00. Though the figure is down from 35.00 last month and down from 31.00 one year ago, we expect a dip in yields and rising home construction (which would keep home prices at check) would supply more buyers to the market in the coming months. Moreover, to attract price-conscious buyers, many builders are offering rates much lower than the prevailing ones through their financing arms.
Improving Supply Chain
Another positive aspect for builders is an improving supply chain. With the decreasing costs of lumber (down 0.4% past month and up 2.5% in the past six months) and more available hiring options, some homebuilding companies, suggest that the issues regarding supply chain disruptions are largely behind them. Housing companies are thus on huge construction spree.
Bottom Line
The housing market is still undersupplied, especially in the entry-level and affordable segments, where many homebuilders are focusing their efforts. This means that there is still strong demand for new homes, especially from first-time buyers and millennials.