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Time for Homebuilding ETFs?

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The homebuilding sector has rebounded a lot this year, although the space suffered in late last year. iShares US Home Construction ETF (ITB - Free Report) is up 18.1% this year (as of Aug 21, 2024) while SPDR S&P Homebuilders ETF (XHB - Free Report) has gained 21.5% in the year-to-date frame. The talks of Fed rate cut in September and the resultant low rates led to the gains.

The sector has long been grappling with higher rates for construction and development loans, prolonged labor shortages, and a lack of land. In July 2024, existing home sales in the United States fell by 5.4% from the previous month, the sharpest monthly decline since 2022, to the fewest number of sales since the start of the year. It was the fourth successive monthly decline in existing home sales.

But rosy days are probably waiting for the homebuilding stocks and ETFs.

Fed to Cut Rates in September?

Expectations that the Fed will cut interest rates in September have caused long-term bond yields to decline, which in turn has pushed mortgage rates downward. The decline in mortgage rates will boost prospective homebuyers’ purchasing power and boost sales. Markets are now fully pricing in a September cut, which would be the first since the covid-19 crisis.

Another Ray of Hope: Increased Housing Inventory

Many market watchers expect increased inventory to eventually boost home sales in the coming months. The supply of existing homes on the market increased 18.5% year over year, totaling 1.28 million homes, partly because homeowners who were waiting for mortgage rates to fall have finally decided to list their properties. Despite this increase, the inventory remains below pre-pandemic levels when mortgage rates were significantly lower.

Upbeat Industry and Sector Ranks

The Zacks Building Products - Home Builders industry contains many of these stocks and currently ranks in the top 6% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. This group has seen 22.40% gains this year (versus 18.76% increase in the S&P 500) but could soar further due to the possibility of easing interest rates.

Quantitative research studies suggest that about half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. Not only upbeat industry rank, homebuilders hail from an upbeat Zacks Construction sector, which ranks in the top 13% out of approximately 16 sectors. The space is up 16.72% this year.

Earnings Trend Appear Good

One of the key players of the sector – Toll Brothers Inc. (TOL - Free Report) reported impressive third-quarter fiscal 2024 (ended Jul 31, 2024) results. Its earnings and revenues surpassed the Zacks Consensus Estimate. For fiscal 2024, the company expects adjusted EPS between $14.50 and $14.75 compared with $12.36 generated a year ago.

D.R. Horton Inc. (DHI - Free Report) reported third-quarter fiscal 2024 (ended Jun 30, 2024) results, with earnings and revenues surpassing Zacks Consensus Estimate. On a year-over-year basis, both the top and bottom lines increased. DHI stock now expects consolidated revenues in the range of $36.8-$37.2 billion versus the prior expectation of $36.7-$37.7 billion.

Meritage Homes Corporation (MTH - Free Report) reported impressive second-quarter 2024 results, wherein the earnings and total closing revenues topped the Zacks Consensus Estimate and grew year over year. Meritage Homes now expects 14,750-15,500 home closings for the year, up from the prior expected range of 14,500-15,000 home closings. The EPS for the year is now expected to be between $19.80 and $21.00, up from the previously expected range of $19.20-$20.70.

Homebuilding Industry Stocks: Compelling Valuation

The homebuilding industry trades at a forward P/E of 9.42X versus 19.47X P/E possessed by the S&P 500 ETF (IVV - Free Report) . The price-to-book ratio of the industry is also favorable at 1.56X versus 4.00X held by IVV. Price-to-sales ratio of the industry is also favorable at 1.05X compared to IVV's ratio of 2.88X.

 

 


 

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