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ETFs in Focus as September Housing Starts Data Disappoints

Sweta Jaiswal, FRM

The latest data on U.S. housing starts is disappointing. The metric declined 9.4% in September to a seasonally adjusted annual rate of 1.256 million units. The figure lags the analysts’ expectations of a 1.320 million units, per a Reuters’ poll. The decline was largely due to weak construction in the multi-family housing segment. However, single-family home construction grew for the fourth consecutive month. The housing starts data compares unfavorably with August’s revised figure of 1.386 million units (the highest level since June 2007). On a year-over-year basis, housing starts rose 1.6% in September.

Building permits, a construction pointer for the coming months, dropped 2.7% to an annual rate of 1.387 million units. It compares unfavorably with August’s 1.425 million units (the highest level since May 2007) (read: Why Homebuilder ETFs Are Rising).

There was a 0.3% rise in single-family homebuilding, which makes up a large portion of the housing market, to a rate of 918,000 units in September. This marks the highest level since January 2019. Regionally, single-family housing starts declined in the Northeast, West, and Midwest, except South. Moreover, permits to construct single-family homes increased 0.8% to 882,000 units in September (the highest level since February 2018) (read: Bet on Top-Notch Sector ETFs & Stocks to Sparkle Q4).

Meanwhile, housing starts for the multi-family housing segment declined 28.2% to a rate of 338,000 units in September. Moreover, there was an 8.2% decline in permits to build multi-family homes to a rate of 505,000 units in September.

Current Housing Market Conditions

The Fed has cut interest rates for the second time at the FOMC meeting in September 2019. When interest rate drops, mortgage rates decline, making real estate or refinancing mortgages more affordable. This, in turn, leads to higher home sales. Per Freddie Mac, the 30-year fixed mortgage rate has declined more than 135 basis points to an average of 3.57%.

However, builders continue to bear the brunt of rising development and construction costs apart from trade woes. 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.

Homebuilder ETFs in Focus

Against the backdrop, let’s take a look at some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 49.6% year to date

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 $1.39 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.1 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders ETF XHB — up 39.2%

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 $751.2 million and trades in average volume of around 2 million shares a day. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (see: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB — up 40.7%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.3% share. It has amassed assets worth $112.4 million and sees lower volume of around 15,000 shares per day on average. Expense ratio comes in at 0.60%. It is a Zacks #3 Ranked ETF with a High risk outlook (read: ETFs to Pick as New Home Sales Surge on Falling Rates).

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
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