The U.S. housing market gained momentum in October on rebuilding efforts after successive hurricanes. This is especially true as existing home sales rose 2% to a seasonally adjusted annual rate of 5.48 million units. This is higher than September’s revised sales of 5.37 million units and Reuters' expectation of 5.42 million units.
However, existing home sales fell 0.9% on a year-over-year basis, for the second consecutive time, and remained below a 10-year-high of 5.70 million units in March. The major headwind facing homebuilders is shortage of both labor and houses that is pushing up the cost of materials and in turn home prices, discouraging people from buying homes. Notably, the median existing-home price for all types of houses in October was $247,000, up 5.5% year over year (read: What Lies Ahead for Housing ETFs?).
Another round of data suggests that homebuilders are back on track. Housing starts climbed 13.8% to a seasonally adjusted annual rate of 1.29 million homes, the highest level since October 2016. Meanwhile, new applications for building permits, a construction bellwether for the coming months, rose 5.9% to an annual rate of 1.3 million. Further, homebuilder confidence rose to 70 this month, the highest reading since March as indicated by the National Association of Home Builders/Wells Fargo sentiment index.
The solid trend is likely to continue in the sector given that lower mortgage rates, ongoing job creation, wage gains, and accelerating household formations will continue to fuel growth, creating a buying opportunity in homebuilders and housing-related stocks. As per mortgage-finance company Freddie Mac, mortgage rates remained low with the average rate for 30-year fixed mortgage rate dropping 3 bps to 3.92%, over the week ending Nov 22.
Further, slower and gradual rate hikes will not thwart the growth prospect of the sector, at least in the near term. Moreover, the homebuilder industry has a solid Zacks Rank in the top 19%, suggesting strong growth potential (read: House Passes Tax Bill: Likely ETF Winners & Losers).
ETFs to Play
Given this, investors might want to look at homebuilder ETFs — iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) and PowerShares Dynamic Building & Construction Fund (PKB - Free Report) — for their exposure to the sector. ITB is easily outperforming with gains of 52.6% so far in the year while XHB and PKB have returned only 25.3% and 20.9%, respectively. These funds have a solid Zacks ETF Rank #2 (Buy), suggesting continued outperformance in the months to come (see: all the Materials ETFs here).
This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.3 billion, it holds a basket of 47 stocks while charging 44 bps in annual fees. The product trades in a heavy volume of around 2.7 million shares a day on average (read: 5 ETF Areas Hitting Highs on Market Dip).
The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 36 securities in its basket with AUM of $1.2 billion and trades in volume of around 1.5 million shares. Expense ratio comes in at 0.35%.
This fund tracks the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It has amassed assets worth $375.9 million while sees moderate volume of around 71,000 shares per day on average. Expense ratio comes in at 0.63%.
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