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Housing ETFs Seesaw Between Poor Sales Data & Solid Earnings

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Home sales data was downbeat in June while earnings from one of the key companies, D.R. Horton (DHI - Free Report) came in upbeat on Jul 26, helping housing ETFs stay afloat. Let’s delve a little deeper into the picture.

Appalling Sales Data

Home sales in the United States, be it existing or new, slipped in June. Existing home sales dipped 0.6% sequentially to $5.38 million in the month. It fell short of market expectations of a 0.5% rise to 5.44 million. The latest data marked the third straight decline and the lowest rate in five months. Sales dropped 2.2% year over year. The median house price rose 5.2% year over year to an all-time high of $276,900 in June.

New home sales in the United States, which makes about 10% of the market, fell 5.3% in June from the previous month to a seasonally adjusted annual rate of 631 thousand, after a downwardly revised 3.9% advancement in May. It marked the lowest rate since October, and lagged market expectations of 670 thousand.

No doubt, the latest data stirred concerns in the housing sector. Housing has been under pressure for quite some time due to rising building material costs and scarcity of land and labor, which caused lower levels of home inventory and higher prices (read: Will Rising Home Prices Hurt Housing ETFs in 2018?).

Appealing Earnings  

Among the recent releases, D.R. Horton came up with a stellar show in the third quarter of fiscal 2018 on Jul 26, before market open. Earnings and revenues surpassed the Zacks Consensus Estimate. Shares of the homebuilder shot up more than 10% on the key trading session on Jul 26.

The company reported earnings of %1.18 per share, breezing past the Zacks Consensus Estimate of $1.08. Earnings increased 55.3% year over year. Total revenues came in at $4.44 billion, trumping the Zacks Consensus Estimate of $4.33 billion and rising 17.4% year over year.

D.R. Horton also raised the consolidated pre-tax profit margin guidance to the range of 12.7-12.9% from 12.1-12.3% expected earlier.

Other companies like NVR Inc. (NVR - Free Report) , KB Home’s (KBH - Free Report) and Meritage Homes Corporation (MTH - Free Report) beat Zacks Consensus Estimate in their most recent releases.

What Lies Ahead?

The rising rate environment in the United States doesn’t bode well for the sector. The monthly average commitment rate was 4.57% in June 2018, up from 3.90% in the year-ago period, per freddiemac. In fact, the rates are moderately higher than the annual average of 2017 (3.99%). 

Though such an uptrend is not good for the housing sector, this much of uptick in rates can be explained by an improving economy and wage growth. Still, if mortgage rates rise continuously, it may eat into some demand.

Also, homebuilders are expected to lose as the new tax bill has lowered the value of the mortgage interest deduction to $750,000 from $1 million, thereby limiting the purchase of luxury homes (read: Tax Bill: What ETF Investors Need to Know).

Are There Chances of Short-Term Recovery?

Upbeat earnings from operators show that there is still hope in the industry. Though supply is limited, existing home inventory rose 0.5% in June from a year ago. This marked the first year-on-year increase since June 2015, per Reuters.

New home inventory rose to 301,000 at the end of June from 296,000 at the end of May. The inventory is now corresponds to 5.7 months supply of housing — the highest level since the start of the year as well as the maximum since March 2009, per Bloomberg. The median sales price of new homes was 4.2% down year over year. All these appear to be a different trend against what we have been witnessing so far.

ETFs in Focus

Against this backdrop, investors should keep a close eye on the housing ETFs in the days to come. SPDR S&P Homebuilders ETF (XHB - Free Report) and iShares U.S. Home Construction ETF (ITB - Free Report) are the two main ETFs in the space. The funds were down 2% and 2.3% on Jul 25, reflecting downbeat new home sales data but added 0.7% and 2% the day next, courtesy of DHI earnings. ITB has a Zacks Rank #3 (Hold), while XHB has a Rank #4 (Sell) (see all industrial ETFs here).

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