The housing sector seems relatively unscathed by the China-led global growth worries last month. A flurry of upbeat data that suggests on-track recovery in the coming months as well corroborates our view.
Solid Data Fuels Growth
There are a number of reasons to be optimistic going forward. This is especially true as Americans are purchasing new homes at the fastest pace seen in more than seven years and homebuilder confidence jumped to the highest level since November 2005. Notably, new home sales soared 5.7% in August while the National Association of Home Builders/Wells Fargo sentiment index rose one point in September.
Though both existing home sales and new home construction dropped 4.8% and 3%, respectively, last month, existing home sales returned to the levels recorded just before the recession began in 2007 and new home construction remained above the one million-unit mark for the fifth straight month. New applications for building permits, a construction bellwether for the coming months, rebounded last month and rose 3.5% after falling 15.5% in July (read: Homebuilding on Sustained Growth: ETFs in Focus ).
Total existing home inventory at the end of August increased 1.3% to 2.29 million units, representing a supply of 5.2 months compared with 4.9 months in July. Inventory of new homes sales was 216,000 units, representing a 4.7-month supply compared to the historic level of 6-month supply. The median sales price for new and existing homes increased 0.3% and 4.7%, respectively. Additionally, the 30-year mortgage rate is currently under 3.9% (as of September 24) as per Freddie Mac, encouraging buyers to purchase more homes.
Soaring demand for homes coupled with limited supply will continue to drive up home prices. This is easily depicted by the S&P/Case-Shiller home price data for June, which showed a continued rise in prices. The year-over-year reading for the 20-city index showed price increases of 5%, well above the 4.4% increase in the year-ago month. Further, accelerating job growth, rising wages, affordable mortgage rates and increasing consumer confidence are injecting bullishness into the sector.
Given the encouraging fundamentals and optimistic outlook, homebuilding stocks and ETFs will continue to surge and lead the market higher in Q4.
Top Homebuilding ETFs
Investors currently have three ETF options, all of which saw ETF Ranks surging by one notch to 2 (Buy) from 3 (Hold) in the latest ratings update. Below we have highlighted two of them (see: all the Materials ETFs here ):
SPDR S&P Homebuilders ETF ( XHB )
The most popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund manages about $2.1 billion in its asset base and trades in heavy volume of more than 3.5 million shares. Expense ratio came in at 0.35%. In total, the fund holds about 37 securities in its basket with none accounting for more than 3.51%.
The product focuses more on mid cap securities with 54% share, followed by 40% in mid caps. From a sector look, homebuilding and building products make up for nearly 64% of assets, while home furnishing retail accounts for a double-digit exposure. XHB has gained 5.1% so far this year.
iShares U.S. Home Construction ETF ( ITB )
This fund provides a pure play to the home construction sector by tracking the Dow Jones US Select Home Builders Index. It holds a basket of 42 stocks with double-digit allocation going to D.R. Horton ( DHI ) and Lennar ( LEN ). About 56% of the portfolio is dominated by mid cap securities while small and large caps take the remainder.
Homebuilding takes the top spot at 65.1%, followed by 14.9% in building products and 8.7% in home improvement retail. The product has amassed $2.3 billion in its asset base and trades in heavy volume of more than 3.5 million shares a day on average. The ETF charges 43 bps in annual fees and has added about 6% in the year-to-date timeframe (read: Summer Madness to Nut Case? A Fall Preview of ETFs ).
Top Homebuilding Stocks
There are a couple of top-ranked picks in this corner of the market that have seen their respective Zacks Rank being upgraded by one notch over the past week. We have highlighted them below.
DR Horton Inc. (DHI)
Based in Fort Worth, Texas, D.R. Horton is America's largest homebuilder engaged in the building of top quality single-family homes designed principally for the entry-level and move-up markets.
The stock has seen solid earnings estimate revisions from $1.89 per share to $2.01 per share for fiscal 2015 over the past 60 days, representing a massive year-over-year increase of 34.3% against the industry average of 13.9%. The company also delivered positive earnings surprises in the last four quarters with an average beat of 6.46%. The stock currently has a Zacks Rank #1 with a Growth Style Score of A, Momentum Style Score of B, and Value Style Score of C, suggesting it could be primed for more growth in the months ahead.
Lennar Corporation (LEN)
Based in Miami, Florida, Lennar is one of the nation's leading builders of quality homes for all generations constructing affordable, move-up and retirement homes (read: Should You Buy Housing ETFs Now? ).
The stock has seen an upward earnings estimate revision from $3.24 to $3.32 per share over the past 60 days for the current fiscal year. This represents substantial year-over-year growth of 18.64%, which is well above the industry growth average of 13.89%. The company has delivered an average positive earnings surprise of 16.12% in each of the past four quarters. Lennar has a Zacks Rank #2 with a Momentum Style Score of B and Growth and Value Style Scores of A.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.