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Why Housing Stocks & ETFs Can Have a Spring in Their Step

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Last week, existing and new U.S. home sales data for the month of February released, which gave mixed signals about the industry. Despite persistently low inventories and a shoot-up in price, existing-home sales recovered in February after two consecutive months of decline and beat market expectations.

On the other hand, new home sales making up about 10% of all U.S. home sales, dipped marking the lowest reading in four months. Meanwhile, home prices continued to rise in January and recorded an annual growth of 6.2%.

Inside the Housing Data

Sales of previously owned houses increased 3% sequentially to a seasonally adjusted annual rate of 5.54 million in February 2018. The market expectation was a 0.5% rise to 5.4 million.

On the other hand, sales of new single-family houses in the United States declined 0.6% sequentially to a seasonally adjusted annual rate of 618 thousand in February of 2018 from an upwardly revised 622,000 in January.

The reading came against market forecasts of a 4.4% increase to 623,000. Sales fell in the West and the Midwest.

Any Bullishness Round the Corner?

In such circumstances, we highlight a few factors that may act as tailwinds for the space.The homebuilding stocks hail from a top-ranked Zacks industry (top 21%).

Sales Slow Down, But New Home Inventory High

Sales of previously owned homes are clearly showing signs of improvement. And though new home sales data are still downbeat, investors should note that the number of new homes on the market jumped by 7,000 units to 301,000 units. This represented the first month since March 2009 with more than 300,000 new homes on the market.

It means a lot for the housing industry which has been tight on inventories for long. The median seasonally adjusted price of new homes sold in January also dropped 0.9% to $326,000 after hitting an all-time high in November. This can boost buying ahead (read: 5 Reasons to Like Housing ETFs Despite Inventory Issues).

Are Current Declines a Return to Normalcy?

As per some analysts, “the declines we are seeing are a return to the trend prior to the tax cut debate.”Notably, the new tax bill lowers the value of the mortgage interest deduction to $750,000 from $1 million. So, probably some buyers wanted to have their mortgages done under the old tax scheme.

This pre-tax plan buying should thus be held responsible for some of the present sales decline. As an evidence, the analyst pointed out that “high priced homes are back down to 17 percent of sales” while sales of homes above $500,000 were 24% of sales in December.

Spring Selling Season: A Seasonal Tailwind

The housing sector is all set to enter the key spring selling season, which is considered the peak time for home sellers. Normally, the season starts in March and lasts through May-June thanks to warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar starts (read: 5 ETFs to Buy in March & Forget Trade War, Inflation Fears).  

Buyers brushed aside fears of sooner-than-expected Fed policy tightening as well as higher home prices. Rather, they are trying to dip their toes in the housing market for as long as the rates remain affordable. A solid job market is doing its bit to drive this segment.

Beneficial Part of Tax Reform for the Housing Industry

Chief Economist at LendingTree indicated that the lower taxes should boost builder profit margins by 10-20%. This may encourage builders to construct more.

On the other hand, the chief economist at Moody’s Analytics reasons out that there are certain housing markets that rely on taxpayers “who use those tax benefits, which have been capitalized into house prices.” In the absence of these benefits, prices are likely to come down (read: Tax Bill: What ETF Investors Need to Know).

Stock Picks

Beazer Homes USA Inc. (BZH - Free Report)

The Zacks Rank #1 (Strong Buy) company builds and sells single family homes. Its last quarter positive earnings surprise of 475% was the highest in the space.

Meritage Corporation (MTH - Free Report)

The Zacks Rank #2 (Buy) company is one of the largest public homebuilder in the United States.

ETF Picks

SPDR S&P Homebuilders ETF (XHB - Free Report)

The housing ETF is well-distributed among its holdings. D.R. Horton, NVR and Lennar are the top three holdings of the fund. No stock accounts for more than 4.67% of the fund.

iShares U.S. Home Construction ETF (ITB - Free Report)

The fund is heavy on Lennar and D.R. Horton, each of which has double-digit exposure to the fund.

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