Markets

ETFs to Gain on Record Rise in Existing Home Sales Since 2006

The housing sector continues to be a bright spot in the U.S. economy amid the coronavirus crisis as the sales of existing homes in August witnessed the strongest pace since the 2006-end. National Association of Realtors (NAR’s) data showed a 2.4% rise in the existing homes sales to a seasonally adjusted annual rate of 6 million units in August (marking three straight months of positive sales gains). Further, existing home sales rose 10.5% year over year.

First-time buyers accounted for 33% of sales last month, up from 31% year over year but down from 34% in July 2020. Existing homes sales increased in all four U.S. regions during August in comparison to the last month and year over year, led by a 13.8% jump from July in the Northeast. Sales in the West inched up 0.8% while it rose 1.4% and 0.8% in the Midwest and South, respectively.

Commenting on the housing market scenario, Lawrence Yun, NAR’s chief economist, said that “home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market. Further gains in sales are likely for the remainder of the year with mortgage rates hovering around 3% and with continued job recovery," per the press release.

Moreover, the median existing-home price for all housing types came in at $310,600, up 11.4% year over year in August, marking the 102 straight months of year-over-year gains. Also, national median home prices had crossed the $300,000 mark for the first time ever in July.

Highlighting the encouraging housing market scenario, the recently-released data on the U.S. builder confidence was upbeat as well. 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 an all-time high of 83 points in September compared with 78 points in August, 72 in July, 58 in June, 37 in May and 30 in April (the lowest since June 2012). Notably, the previous month’s reading was the highest in the 35-year long history of the index, matching the December 1998 record. Any reading above 50 is considered positive and signals at improving the sentiment. Notably, all three components of the index gained. 

Low interest rates are boosting demand in the housing market, increasing the number of mortgage applications. Analysts believe that support from the Federal Reserve is retaining the rates at such modest levels. The Fed in its commitment to drive economic recovery at the recently-concluded meeting decided to keep the interest rates at near-zero level. Among the central bank officials who participated in the meeting, most expect to keep the rates close to zero at least through 2021 while 13 of them project the same to stay at such an ultra-low level until 2023.

The housing market is expected to also steadily benefit from changing demographical preferences of a large chunk of population, which is now looking for work-from-home-friendly properties. NAR’s August study, the 2020 Work From Home Counties report, also highlights that people will increasingly prefer more remote working opportunities, which will  America’s work environment.

Meanwhile, the rising lumber prices, which have skyrocketed more than 170% since mid-April, can slow down the housing market despite low interest rates. In this regard, Lawrence Yun reportedly said that "over recent months, we have seen lumber prices surge dramatically. This has already led to an increase in the cost of multifamily housing and an even higher increase for single-family homes."

Homebuilder ETFs Shining Bright

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

iShares U.S. Home Construction ETF ITB  

This fund provides exposure to the U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.38 billion, it holds a basket of 46 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: 4 Sector ETFs to Benefit From 3-Year Lower Rates).

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 $1.34 billion. 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 a basket of well-diversified 31 stocks, each accounting for less than a 5.27% share. It amassed assets worth $127.4 million. The expense ratio is 0.60%. The fund is Zacks #3 Ranked with a High-risk outlook.

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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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