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Housing ETFs Soar on Upbeat Earnings With More Room to Run

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The housing sector appears in good shape if we go by the recently-released earnings reports. Not only earnings, the recent volley of data points also paints a rosy picture about the industry. Existing-home sales in the United States (which makes up the main part of the whole industry) jumped to the best clip in about two years.

Sales of previously-owned homes rose 3.6% in December to an adjusted annual rate of 5.54 million. The median sale price hit $274,500, marking a 7.8% year-over-year rise as demand outdid supply. Mortgage rates, which slumped to a three-year low, mainly drove the space (read: REIT ETFs to Gain as Mortgage Rates Dip to 3.5-Year Low).

Construction has also been decent with the U.S. housing starts reaching the highest level in 13 years. Housing starts soared nearly 17% in December. Against this upbeat backdrop, we highlight the earnings releases of the industry biggies and see if the rally could be more prolonged.

Inside Housing Earnings

At January-end, D.R. Horton, Inc. (DHI - Free Report) reported better-than-expected results for first-quarter fiscal 2020. The homebuilder foresees continuation of strong demand in the remainder of fiscal 2020. Solid demand, a limited supply of homes at affordable prices across the markets served, favorable economic fundamentals and low rates helped DHI shares gain about 4% in the past 10 days (as of Feb 7, 2020).

Adjusted earnings came in at 99 cents per share in the quarter, surpassing the Zacks Consensus Estimate of 92 cents by 7.6%. The reported figure also improved from the year-ago profit of 76 cents per share. Total revenues (Homebuilding, Forestar and Financial Services) came in at $4.02 billion, up 14.3% year over year. The reported figure also topped the consensus mark of $3.78 billion.

In late-January, PulteGroup Inc. PHM came up with fourth-quarter 2019 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Higher demand owing to favorable housing dynamics drove results.

Earnings per share came in at $1.14, beating the consensus mark of $1.08 by 5.6%. The bottom line also grew 2.7% year over year. Total revenues of $3.02 billion outpaced the consensus mark of $2.97 billion by 1.5% and increased 0.6% from the year-ago figure of $2.99 billion. PHM shares have added 5.5% in the past 10 days.

Around the same time, Meritage Homes Corporation’s MTH fourth-quarter 2019 earnings of $2.65 per share topped the Zacks Consensus Estimate of $1.92 by an impressive 38%. Also, the reported figure improved 39% year over year backed by solid home closing revenues, gross margins and greater overhead leverage. Total revenues (including Homebuilding and Financial Services revenues) amounted to $1.14 billion, up 12.7% from year-ago quarter’s levels. MTH shares have advanced 7.5% in the past 10 days.

ETF Impact

The bullishness over important homebuilding stocks like DHI, MTH and PHM should shower gains on the broad housing ETFs. These include SPDR S&P Homebuilders ETF XHB with a Zacks ETF Rank #3 (Hold), iShares U.S. Home Construction ETF ITB with a Zacks ETF Rank #3 and Hoya Capital Housing ETF HOMZ.

ITB was the biggest beneficiary of the earnings releases as the fund puts about 21.5% in DHI and PHM combined. HOMZ added about 0.6% in the past 10 days as the fund puts 1-2% weight in the above-mentioned stocks. The fund XHB puts about 9% in DHI and PHM together. However, XHB has lost 0.3% in the past 10 days (as of Feb 7, 2020).

More Rally Ahead?

The housing sector is set to enter the key spring selling season, which is considered to be the peak time for home sellers. Normally, the season starts in March and lasts through May-June, thanks to warmer weather conditions.

Plus, apart from raw materials, the U.S. homebuilding sector is not that dependent on China. So, from this context as well, the industry’s earnings for the next quarter should not be hurt much from the coronavirus outbreak. The homebuilding industry currently belongs to a favorable Zacks industry (placed at the top 17% of 250+ industries). 

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