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Can Surging Housing ETFs Withstand Fed Hike Worry?

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Sales are picking up in the housing sector with the spring selling season in full swing. New U.S. single-family home sales logged the biggest leap in 24 years in April. Sales of new single-family homes rose 16.6% to a seasonally adjusted annual rate of 6,19,000 units in April, which is more than an eight-year high.

Moreover, existing home sales rose for the second straight month in April, beating the consensus estimate of 5.38 million units for the month. Sales rose 1.7% from the revised level of March. If this was not enough, the median sales price inched up 9.7% year over year to $321,100 in the month, while the average sales price climbed 6% to $379,800.

What Drives Home Sales?

A healing labor market coupled with improving wage gains must have helped buyers to go on a house buying spree. Hourly earnings in April rose 0.3% month over month and 2.5% year over year. The 5% unemployment rate and positive momentum in average wage growth explains the surge behind home sales.
Moreover, the U.S. economy has delivered a host of upbeat economic readings in the field of retail and consumer sentiment. This speaks about buyers’ positive outlook on economic well-being (read: Play US Recovery with These Small-Cap Blend ETFs).

Added to this, mortgage rates are presently at subdued levels. The monthly average commitment rate of 30-year fixed-rate mortgages was 3.61% in April, down from 3.69% seen in March and 3.67% recorded in April 2015, as per Freddie Mac. The mortgage rates are way below the historical levels (read: First Trust Plans for a Mortgage REIT ETF).

What Lies Ahead?

With growing possibilities of the Fed hiking rates in a month or two, fears of rising mortgage rates will be back into play. Considering a likely Fed move, even if mortgage rates rise in the latter half of the year – as is widely anticipated – housing should still be reasonable.

Apartment rental rates have jumped considerably in the last few months. Overall, rents rose 2.8% between April 2015 and April 2016. If the trend continues, the lure for home buying should be more than renting.

Also, even if mortgage rates rise post Fed hike, it would be much lower than the historic levels before 2000. Mortgage rates of about 7% to 8% were usual then for the month of April (read: Fed to Hike in June? Expected ETF Moves).

Yes, low inventory is still an issue for the housing sector which is why prices shot up amid higher demand. But we believe that the supply scenario should improve ahead given an increase in buying. Notably, housing earnings released in the last one–two months also came in strong (read: Buy Housing ETFs on Upbeat Earnings, Existing Home Sales Data).

Play the Sector
Given the improving fundamentals, the homebuilding sector deserves a closer look. The sector is in the top 43% section in the Zacks industry universe, at the time of writing.

Below, we have highlighted three ETFs and stocks that are worth a look. In the last five days (as of May 25, 2016), these witnessed strong gains.

ETFs to Tap

These include SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF(ITB) and PowerShares Dynamic Building & Construction Fund (PKB) with a Zacks ETF Rank #2 (Buy).

Stocks in Focus

Below we highlight three stocks with a Zacks Rank #3 (Hold) at the time of writing.

Meritage Homes Corporation (MTH)

DR Horton Inc. (DHI)

Toll Brothers Inc. (TOL)

Bottom Line

The homebuilding sector is surging on solid data points. Though things could change ahead when the Fed possibly opts for a rate hike and housing stocks slip for the short term, one could definitely take advantage of the latest opportunity to cash in on the sudden momentum surge in the sector.

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