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ETFs to Grab as US Existing Home Sales Hit a 5-Month High

Sweta Jaiswal, FRM

Offering respite from Trump’s trade-related alerts, sales of existing homes in the United States rose in July to a five-month high, pleasing homebuilders and investors. Sales of single-family homes, townhomes, condominiums and co-ops rose in Midwest, South, and West regions in the United States, except for Northeast. The West region witnessed an 8.3% rise in home sales. According to National Association of Realtors’ (NAR) chief economist, Lawrence Yun, the July existing-home sales data indicated “incredibly low mortgage rates and strong job market conditions.”

A Sneak Peek Into NAR’s Data

NAR’s data showed that sales of existing homes, accounting for around 90% of total U.S. home sales, increased 2.5% to a seasonally adjusted annual rate of 5.42 million units in July, contrary to the nominal decline in June. It compares favorably with economists’ median forecast of 5.40 million pace in a Bloomberg survey. Moreover, total sales rose 0.6% over the year-ago period. Notably, recent data marked July as the second-strongest month in terms of existing home sales since April 2018.

Moreover, in comparison to 4.4 months needed to deplete the supply of homes in June, the latest data suggests that just 4.2 months will suffice. However, the first-time buyers accounted for 32% of sales in July, down from 35% in June.

What’s Driving the Upside?

It is widely believed that declining mortgage rates have helped the residential real estate sector as lower borrowing costs are making buying new houses more affordable. Per Freddie Mac, the average 30-year fixed mortgage rate has declined to 3.6%, the lowest since November 2016. Also, the Federal Reserve has cut interest rate by 25 basis points to 2.25% for the first time since 2008 at the FOMC meeting in July 2019. Meanwhile, investors are optimistic that the Fed will announce more federal funds interest rate cuts in 2019 (read: Fed Cuts Rate: Sector ETFs & Stocks Set to Soar).

There was a shortage in the supply of affordable homes which bumped up prices for this category. In this regard, the median existing-home price in July was $280,000, up 4.3% year over year. July also marked the 89th consecutive month of year-over-year gains. In July, total housing inventory declined 1.6% from the prior-year period. Commenting on the situation Lawrence Yun said,  “the shortage of lower-priced homes have markedly pushed up home prices.”

ETFs to Snap Up

Lawrence Yun has commented that housing sales might pick up in the second half of 2019. Given the improving housing market conditions, it will be prudent for investors to park their money in some homebuilder ETFs.

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 $1.07 billion, it holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 2.4 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Americans' Confidence at About 18-Year High: Bet on These ETFs ).

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 holds about 35 securities in its basket. It has AUM of $634 million and trades in volume of around 2.5 million shares. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (see:  all the Materials ETFs here ).

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting for less than 5.5% share. It has amassed assets worth $109 million and sees lower volume of around 15,000 shares per day on average. Expense ratio comes in at 0.58%. It has a Zacks ETF Rank #3 with a High risk outlook (read: ETFs to Grab Amid Increased Odds for Fed Rate Cut).

Conclusion

The NAR’s data for existing-home sales reflects improving housing market conditions. Moreover, the housing starts data suggested a rise in building permits and construction of single-family homes reaching the highest point since January. In fact, improving economic conditions, rising home buyers’ confidence on economic growth and favorable demographic changes are likely to support demand in the near term as well.

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