It seems the tiding is going to be great for the housing market. One market watcher recently insisted that there is enough economic data that permit the Fed to “take preemptive action here and cut interest rates.”
At the current level, according to CME FedWatch tool, there is an 88.8% chance of a 25-bp rate cut in the Sep 18 meeting, followed by an 11.2% probability of a no-rate-cut scenario. As of Aug 22, 2019, the benchmark U.S. treasury yield was 1.62% versus 2.66% noted in Jan 2019.
Since low interest rates are beneficial for homebuilding stocks and ETFs, investors can definitely bet on the space right now. In any case, the segment is showing promise both operationally and stock-price-wise.
Sales of existing homes in the United States rose 2.5% from the previous month to a seasonally adjusted annual rate of 5.42 million in July 2019, higher than market expectations of 5.39 million. Existing home sales make up about 90% of U.S. home sales.
But sales for the prior three months were lowered. While overall sales witnessed a spurt in June, the West was responsible for most of the gains, where sales surged 50.4%. Lower mortgage rates led to gains in the housing sector.
Unlike last year, the Fed has been pretty dovish from the start of this year. The central bank has pledged to take a patient stance toward the future rate outlook amid global growth worries. The Fed has also enacted a rate cut this year. Buyers will be trying to dip their toes into the housing market for as long as the rates remain affordable. A solid job market is doing its bit to drive this segment. This is why despite persistently low inventories and rising price issues, the latest pool of sales data came in favorable.
July’s increase made existing home sales “higher than they were a year earlier for the first time in 17 months.” The U.S. home market started struggling from last year due to the Fed’s continued rate hiking spree. However, the central bank enacted its first rate cut in July since 2008, in order to keep chances of a U.S. recession at bay.
The 30-year fixed mortgage rate declined to an average of 3.77% in July from more than a seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac, as quoted on CNBC. The average rate dropped to 3.6% in the Aug 15 week and there are cues that the Fed may cut rates in September due to concerns about economic slowdown, per CNBC.
However, pressure on inventory and rising prices are bothering the space. There were 1.89 million previously owned homes on the market in July, down from 1.92 million in June and a 1.6% decrease from July 2018. The median existing house price increased 4.3% from a year ago to $280,800 in July.
At July’s sales pace, it would take 4.2 months to clean up the current inventory, down from 4.4 months in June. “A six-to-seven-month supply is viewed as a healthy balance between supply and demand,” per CNBC.
Against this backdrop, below we highlight a few stocks and ETFs that could be in focus in the coming days.
Stocks in Focus
Builders FirstSource Inc. (BLDR)
The Zacks Rank #2 (Buy) Builders FirstSource is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. The stock is up 79.7% this year.
BMC Stock Holdings Inc.
The Zacks Rank #1 (Strong Buy) company provides diversified building products and services to professional builders and contractors primarily in the residential housing market. The stock is up 63.8% this year.
ETFs in Focus
SPDR S&P Homebuilders ETF (XHB)
The fund tracks the S&P Homebuilders Select Industry Index and charges 35 bps in fees. No stock accounts for more than 4.78% of the portfolio. The fund is up about 30% this year (read: ETFs to Grab as US Existing Home Sales Hit a 5-Month High).
iShares U.S. Home Construction ETF (ITB)
The fund tracks the Dow Jones U.S. Select Home Builders Index, which includes companies that are constructors of residential homes, including manufacturers of mobile and prefabricated homes. The fund is heavy on two companies — D R Horton and Lennar. It charges 42 bps in fees. The fund has gained about 36.1% this year.
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