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Time to Buy Beaten-Down Homebuilder ETFs?

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The U.S. housing market has started to show signs of respite given the slew of upbeat data.  After two months of consecutive decline, new home sales rebounded in August, climbing 3.5% to a seasonally adjusted annual rate of 629,000.

A report last week showed housing starts came in above expectations, rising 9.2% in August — the highest increase in seven months. Additionally, existing home sales also remained stable last month after four straight months of decline. Homebuilder confidence also remained steady in September as depicted by the National Association of Home Builders/Wells Fargo Housing Market Index.

However, building permits — a construction pointer for the coming months — unexpectedly declined 5.7% last month, representing the biggest drop since February 2017 (read: Homebuilder ETFs in Focus as Starts Jump, Permits Fall).

Though rising costs of lumber, land and labor are derailing the recovery in the housing market, demand for homes remained firm especially as millennials and other newcomers enter the market. Millennials who long delayed home ownership are now on a home buying spree. Lumber prices has also recently declined from the record-high levels. Additionally, Americans’ spending has been boosted by recent tax cuts coupled with wage gains.

With the Fed on track to raise interest rates, mortgages rates are expected to rise and make homes costlier, hampering affordability. The 30-year fixed mortgage rates have increased more than 60 bps this year to an average of 4.65%. This is nevertheless much below the average rate of nearly 8% over the past 45 years, suggesting that the rates are still at historic lows. As such, most borrowers seeking to buy homes would want to lock in the still-low rates, creating solid demand.

If these weren’t enough, the rise in home price has slowed down a bit in July. This is especially true as the S&P CoreLogic Case-Shiller 20-city home price index jumped 5.9% in July, the slowest pace in 10 months and was down from a 6.4% rise in June.

Further, the homebuilders are currently well placed, belonging to a top-ranked Zacks Industry (top 38%), suggesting that rising home prices and mortgage rates are unable to take the sheen away from the sector (read: Luxury Home Market Stays Strong: ETF & Stock Picks).

ETFs in Focus

Given this, investors might want to look at the homebuilder ETFs — iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) and Invesco Dynamic Building & Construction ETF (PKB - Free Report) — for exposure to the sector  (see: all the Materials ETFs here).

ITB

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $962.9 million, it holds a basket of 47 stocks while charging 43 bps in annual fees. The product trades in heavy volume of around 2.6 million shares a day on average and has a Zacks ETF Rank #3 (Hold) with a High risk outlook. It has lost 17.4% so far this year.

XHB

The most popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket with AUM of $763.2 million and trades in volume of around 2.6 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook. XHB is down 11.4% in year to date.

PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding 30 stocks in its basket. It has amassed assets worth $194.2 million and sees moderate volume of around 45,000 shares per day on average. Expense ratio comes in at 0.58%. PKB has shed 13% so far this year and has a Zacks ETF Rank #3 with a High risk outlook (read: 4 ETFs Set to Soar in the Aftermath of Hurricane Florence).

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