Markets

ETFs to Gain as Homebuilder Confidence Rally Continues in July

The latest data on the U.S. housing market has pleased investors even as the number of coronavirus cases continues to rise in the United States. Per the monthly National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (“HMI”), builder confidence for newly-built single-family homes surged to 72 points in July from 58 in June, 37 in May and 30 in April (the lowest since June 2012). The metric also surpassed analysts’ expectations of the reading to rise up to 60, per a Nasdaq article. Going on, July’s 14-point increase marks the return of the builder confidence to the pre-pandemic level of March. Notably, any reading above 50 is considered positive and signals improving confidence.

Notably, all three components of the index gained. The current sales conditions came in at 79 compared with 63 in June, the buyer traffic surged to 58 from 43 last month and sales expectations rose to 75 in July from 68 in the prior month, per the NAHB press release. The monthly averages regional HMI scores in the Northeast spiked 22 points to 70. Moreover, the South index rose 10 points to 73. Moreover, the Western index jumped 14 points to 80, with the Midwest rising 18 points to 68, per the release.

Current Housing Market Scenario

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Per a Reuters article, the 30-year mortgage rate declined to an average of 2.98% in the week ending Jul 17 compared with 3.03% in the prior week. In fact, since Freddie Mac started its mortgage market survey in 1971, these rates have never dropped below 3%. Moreover, 15-year fixed mortgage rates also declined to an average of 2.48% in this week, from 2.51% in the prior week, according to a Reuters article.

Analysts believe that support from the Federal Reserve is helping keep rates at such low levels. Also, rising uncertainty related to the coronavirus outbreak is driving demand for safe-haven assets like U.S. Treasuries (per the Reuters article). This in turn will help drive consumer spending and demand in the housing market.

Meanwhile, inventory scarcity continues and might lead to further price increases. However, low employment levels and aggravating coronavirus outbreak can continue to impede momentum of the U.S. housing market.

In this regard, NAHB Chief Economist Robert Dietz said that, “lumber prices are at a two-year high and builders are reporting rising costs for other building materials while lot and skilled labor availability issues persist”. Commenting on the rising demand in the housing market he also said that “new home demand is improving in lower density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead.”

Homebuilder ETFs That May Gain

iShares U.S. Home Construction ETF 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 $1.76 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 #3 (Hold), with a High-risk outlook (read: Mortgage Rates At Record Lows: Buy Homebuilder & REIT ETFs).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $899.2 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 32 stocks in its basket, each accounting for less than a 5.29% share. It has amassed assets worth $96.3 million. The expense ratio is 0.60%. It is a Zacks #3 Ranked ETF, with a High-risk outlook (see: Trump or Biden, Infrastructure ETFs to Soar Higher).

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SPDR SP Homebuilders ETF (XHB): ETF Research Reports

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

Invesco Dynamic Building Construction ETF (PKB): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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