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What Will Impact Housing ETFs: Strong Earnings or Soft Sales?

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The housing sector appears in great shape if we look at the recently released earnings. However, the recent volley of data points tells another story. Both existing and new home sales dropped in December with the former seeing a 2.8% decline and the latter witnessing a 10.4% plunge from November. 

The data points hint at the pressure on affordability. Economists expected a much lower decline (1.5%) in new home sales while existing home sales were expected to fall 1.8%. Higher mortgage rates thanks to the Fed’s policy tightening stance and Trump’s promise for fiscal reflation as well as increasing home prices mainly due to record low inventories led to this shocking fall (read: Yellen Hints at Faster Rate Hikes: 4 ETFs to the Rescue).

On a positive note, existing home sales – making up the major requirements of U.S. home sales – rose for three months in a row before falling in December. Also, an improving labor market and the possibility of lower taxes in the Trump administration should again energize the housing market. Also, the key spring selling season for homes is in the offing (read: ETFs & Stocks Set to Benefit from December Job Data).

The sector also falls in the top19% in the Zacks Industry Universe, while its Zacks Industry Rank is in the top 15%.  Housing earnings released lately also point to stabilization. Below we peek into the assuring earnings picture of the sector.
 
Inside Housing Earnings
 
D.R. Horton ((DHI - Free Report) ), one of the biggest and well-known homebuilders in the nation, came up with solid fiscal first-quarter 2017 results on January 24, before the bell. The housing company’s earnings and sales beat the respective Zacks Consensus Estimate.

The company reported earnings of $0.55 per share which beat the Zacks Consensus Estimate of $0.47 by 17%. Earnings also increased 31% year over year driven by higher home sales. Total revenue (homebuilding and financial services) of $2.904 billion beat the Zacks Consensus Estimate of $2.719 billion by 6.8%. Total revenue also rose 20.2% year over year.

Homebuilding revenues of $2.83 billion rose 19.7% year over year. Home sales increased 19.5% year over year to $2.79 billion aided by higher home deliveries. Home closings increased 20% to 9,404 homes. 

The company registered growth in the Midwest, Southeast, South Central, Southwest and West regions. Meanwhile, the Eastern region was on par with the year-ago level. Net sales orders rose 15%. The quarter-end sales order backlog (under contract) increased 6%.

D.R. Horton retained a positive outlook for revenues and profits, both of which are expected to increase double digits, on the year-over-year basis.

Another construction companyPulteGroup Inc. ((PHM - Free Report) ) also surpassed the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter of 2016 on January 26. Adjusted earnings of $0.67 per share beat the Zacks Consensus Estimate of $0.58 by 15.5%. However, quarterly earnings increased 17.5% from the year-ago quarter’s adjusted figure of $0.57.

PulteGroup’s total revenue of $2.49 billion surpassed the Zacks Consensus Estimate of $2.33 billion by 6.9%. Revenues were also up 20.9% year over year on an increase in the number of homes delivered. Homebuilding revenues rose 21.4%. New home orders increased 14.8% year over year.

ETF & Stock Impact

In the last five days (as of January 30, 2017), DHI and PHM added over 6.8% and 11.4%. The bullishness over important homebuilding stocks like DHI and PHM, should shower gains on the broad housing ETFs. These include SPDR S&P Homebuilders ETF ((XHB - Free Report) ) with a Zacks ETF Rank #3 (Hold), iShares U.S. Home Construction ETF (ITB - Free Report) with a Zacks ETF Rank #2 (Buy) and PowerShares Dynamic Building & Construction Fund ((PKB - Free Report) ) with a Zacks ETF Rank #2.

DHI has 4.86% weight in XHB and takes the third spot while the stock takes the first spot in ITB with 12.9% weight. PHM takes 4.91% of XHB and the first position, while the stock takes 7.98% of ITB. PHM is the fourth place holder in ITB.

Bottom Line

DHI has a Zacks Rank #2 (Buy) and a VGM (Value-Growth-Momentum) score of ‘B’. PHM too has a Zacks Rank #2 with a VGM score of ‘B’. So, both stock-wise and ETF-wise, the housing sector looks to be a buy.

Those who are worried about retreating existing and new home sales of December, there is a news of comfort for them – pending home sales, which shows a monthly survey of signed contracts, nudged up 1.6% in December sequentially and 0.3% year over year.

Plus, we would like to note that we are at the start of the key spring selling season and the sector is likely to cross the present hurdles in the days to come. So, it’s better to forget the December dip, and instead be hopeful of a Spring rebound (read: What Lies Ahead for Housing ETFs in 2017?).

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