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Upbeat Data Sparks Rally in Housing Stocks and ETFs

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Trump’s victory has shaken the homebuilding space as mortgage rates have soared to a 10-month high on the belief that the President-elect’s policies will spur faster growth and inflation. Higher borrowing cost makes homes costlier, discouraging people from buying homes. However, the sentiment reversed yesterday after the latest upbeat data, which showed that new home construction jumped to a more than nine-year high in October and that permits soared (read: 5 ETFs to Cash in on Home-Buying Spree).

U.S. housing starts climbed 25.5% to a seasonally adjusted annual rate of 1.3 million homes and much higher than the Reuters’ expectation of 1.16 million. This represents the biggest gain since July 1982. Uptick in construction activity was broad-based with a big 75% jump in apartment construction, a 68.8% increase in multi-family houses and a 10.7% rise in single-family houses.

New applications for building permits, a construction bellwether for the coming months, moved up 0.3% to an annual rate of 1.23 million. Further, homebuilder confidence held steady near the highest level of the year as indicated by the National Association of Home Builders/Wells Fargo sentiment index.

The upbeat data has spread optimism into the homebuilder space, propelling the stocks higher. In particular, DR Horton (DHI - Free Report) , Lennar Corporation (LEN - Free Report) , Toll Brothers (TOL - Free Report) and PulteGroup (PHM - Free Report) gained at least 2.7% on the day. Smooth trading has also been felt in the ETF space, with iShares U.S. Home Construction ETF (ITB - Free Report) ,SPDR S&P Homebuilders ETF (XHB - Free Report) andPowerShares Dynamic Building & Construction Fund (PKB - Free Report) rising 2.1%, 2.0% and 1.2%, respectively (see: all the Materials ETFs here).

With this gain, ITB, XHB and PKB has risen 2.7%, 3.8% and 10.5%, respectively, over the past one month. ITB and XHB have a Zacks ETF Rank of 1 or ‘Strong Buy’ rating while PKB has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting smooth trading in the days ahead as well. However, the residential and commercial building industry has a dismal Zacks Rank in the bottom 12%.

While increased hiring, rising wages and accelerated economic growth continue to bolster demand for housing, the recent rise in mortgage rates and further prospects of rates going higher under Trump presidency could stall the recovery in the housing market (read: 5 Millennial Friendly ETF Investing Ideas).

As per the mortgage-finance company Freddie Mac, the average rate for 30-year fixed mortgage rate climbed to 3.94% for the week from 3.57% last week. In fact, the rates have risen 40 bps over the past two weeks. Still, this is considered low given the 3.97% mortgage rate a year ago at this point of time.

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