The housing sector in the United States remains strong, thanks to low mortgage rates, a robust job market and increasing wages. Existing home sales, accounting for around 90% of U.S. home sales, rose 9.6% year over year in January. The National Association of Realtors (NAR’s) data showed a 1.3% decline in the existing homes sales to a seasonally-adjusted annual rate of 5.46 million units in January. Lack of sufficient inventory is being considered a major reason behind this decline. However, the metric beats Reuters economists’ forecast of a 1.8% decline to 5.43 million units. Existing home sales were up in the Midwest and the South, and remained flat in the Northeast. Meanwhile, sales declined in the West (read: Will the Rally in Homebuilders ETFs Continue in 2020?).
Supply Crunch Prevails
Builders continue to bear the brunt of rising development and construction costs. They are still grappling with regulatory burdens, deficit of lots and lack of skilled labor. These hurdles are affecting supply, which in turn, is disturbing the reasonable pricing of homes. In fact, there was a 10.7% year-over-year fall to 1.42 million in the number of previously-owned homes in the market this January.
Of late, a surge in home prices has been observed, which is eroding the benefits of low mortgage rates and thus, marring sales. The median existing house price flared up 6.8% this January to $266,300 from last year's level.
Moreover, in comparison to the three months needed to deplete the supply of homes in December, the latest data suggests that only 3.1 months will suffice at January’s sales pace. Notably, a six-to-seven-month supply is considered a healthy balance between supply and demand.
Low Mortgage Rates a Boon
After three rate cuts in 2019, the Fed hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector, as lower borrowing costs are making new houses more affordable. According to data from the mortgage finance agency Freddie Mac, the 30-year fixed mortgage rate averages 3.47% — the lowest since October 2016. Fears surrounding the aggravating coronavirus outbreak are also inducing low mortgage rates. This is because mortgage rates are guided by the treasury yields that are sliding, thanks to a rise in demand for safe-haven assets (read: Play These Bond ETFs to Keep the Coronavirus Fear at Bay).
Homebuilder ETFs to Shine
Given the encouraging scenario in the U.S. housing market, let’s take a look at a few homebuilder ETFs.
iShares U.S. Home Construction ETF (ITB - Free Report) — up 37.9% over the past year
This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With an AUM of $1.59 billion, it holds a basket of 44 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: Sector ETFs at the Midpoint in Q1: Hits & Misses).
SPDR S&P Homebuilders ETF (XHB - Free Report) — up 22.3%
A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 34 securities in its basket. It has an AUM of $844.9 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook (read: Housing ETFs Soar on Upbeat Earnings With More Room to Run).
Invesco Dynamic Building & Construction ETF (PKB - Free Report) — up 28.8%
This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.54% share. It has amassed assets worth $113.5 million. Expense ratio is 0.60%. It is a Zacks #2 Ranked ETF with a High-risk outlook (see: all the Materials ETFs here).
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