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Why Housing Market & ETFs Are Due for a V-Shaped Recovery

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The U.S. housing market was one of the worst-hit amid the coronavirus-led lockdown. In any case, the space was struggling with land and labor shortage as well as higher prices. The coronavirus outbreak had made matters worse. However, things are looking up lately.

Per real estate brokerage Redfin, home-buying demand has come back with forceand is now 16.5% above pre-coronavirus levels on a seasonally adjusted basis, helped by record-low mortgage rates. Inventories failed to meet demand.

Touring homes virtually with online 3D walkthroughs is gaining popularity due to the pandemic. For the week of May 10, 9% of new homes listed for sale had a 3D model, up from only 2% in January and February prior to the pandemic.

Another group expects home sales in the United States to rebound in late summer and early fall as fears of coronavirus begin to cool down, before experiencing a slump again later in the year. Alex Pettee, president, director of Research & ETFs, Hoya Capital Real Estate, also believes that “some metrics [of the housing industry are] showing a "V-Shaped" recovery pattern.”

Below we highlight the factors that could cause a sharp recovery in the near term.

Low Mortgage Rates  

Per a report from Mortgage Bankers Association issued on May 20, "applications for home purchases continue to recover from April's sizeable drop and have now increased for five consecutive weeks. Purchase activity - which was 35 percent below year-ago levels six weeks ago - increased across all loan types and was only 1.5 percent lower than last year." However, despite record-low mortgage rates, refinance activity slid to its lowest level in over a month due to tighter credit conditions. But the momentum should stay healthy for the remainder of 2020.

Likely Decline in Home Prices

The coronavirus crisis is likely to cause the price to decline 2-3% a by the end of 2021, per Zillow Group, which estimated that U.S. GDP will decline 4.9% this year and increase 5.7% next year. The decline in economic growth will also cause home sales to drop up to 60% when compared to pre-coronavirus levels.

Post-Pandemic “Suburban Revival”

According to Pettee, a potential post-pandemic “suburban revival” would boost home buying. The coronavirus outbreak has made the work-from-home option is a big hit. Companies now will likely be offering the option permanently with more ease; so many are now moving to suburban areas to avoid high expenses needed to incur in a dense and expensive city. Suburban areas offer more affordable homes.

Millennial-Led Demographics

Investors should note that millennials have overtaken baby boomers in U.S. population. In 2020, millennials are expected to buy the majority of real estate in the United States, per a report from published in early February, quoted on CNBC.

“ predicts that millennials’ share of mortgage originations will surpass an unprecedented 50% in the spring, outnumbering the share of total homes purchased by members of Generation X and baby boomers, at a respective 32% and 17%.” Though the COVID-19 outbreak stalled the momentum at the start of Spring, pent-up demand from millennials should be realized now with record-low rates.

Decent Credit Conditions of Sector Players

Investors should note that due to the Fed’s plan to buy corporate bonds this year, there has been a surge in debt issuances among American companies of late.

So, credit ratings of the housing company's proposed senior unsecured note offerings can act as a guidance for the sector’s wellbeing. Fitch Ratings recently affirmed a Stable outlook to NVR (NVR) and D.R. Horton’s (DHI) proposed debt offering. Both have received a BBB+ and BBB rating, respectively, indicating decent credit conditions.

Overall, debt-equity ratio of the sector stands at 0.50x versus for the S&P 500-based ETF SPY’s 0.76x. Current ratio of the industry stands at 4.44x versus 1.29x of IVV, meaning the sector is well-positioned in meeting short-term liquidity need. 

ETFs in Focus

Hoya Capital Housing ETF (HOMZ - Free Report) , iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) are three ETFs that should be followed amid the ongoing recovery in the housing market. The trio has gained 22.2%, 40.4% and 32.6%, respectively, past month against 7% gains in the S&P 500.

Investors should note that HOMZ offers a bit diversified exposure with home ownerships & rental operations taking as well as home construction taking 30% focus each. Home furnishings have 20% of the focus and home financing occupies 20% too.

On the other hand, ITB puts 70% focus on Homebuilding, 11.9% on Building Products and 9.5% on home improvement retail.  XHB is also diversified with Building Products taking 33%, Homebuilding making up 32.7% of the fund, Home Improvement Retail occupying 14.1% and the Home Furnishings segment having overall 13% exposure.

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