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ETFs That May Suffer Owing to Weak US Existing Home Sales

Sweta Jaiswal, FRM

After the release of upbeat U.S. housing data of late, the latest update on U.S. existing home sales looks comparatively disappointing. Sales of existing homes in the United States fell more than expected in November. Lack of availability of properties for sale might have been the main reason for the decline. In fact, existing home sales declined across two of the four regions in November. Sales were up 2.3% in the Midwest and 1.4% in the Northeast. Meanwhile, existing home sales declined 3.9% in the South and 3.5% in the West (read: 5 Best Stocks in the Hot Homebuilding ETF).

A Glimpse of NAR’s Data

NAR’s data showed a 1.7% drop in existing homes sales to a seasonally adjusted annual rate of 5.35 million units in November. This compares with the downwardly revised 5.44 million units in October. Moreover, it disappoints when compared with Reuters economists’ forecast of a 0.2% decline to 5.44 million units. However, existing home sales rose 2.7% year over year. In fact, it was the fifth consecutive month of year-over-year gains (read: ETFs in Focus on Upbeat November Housing Starts Update).

Moreover, in comparison to the four months needed to deplete the supply of homes in the year-ago period, the latest data suggests that only 3.7 months will suffice.

Lean Housing Inventories: A Major Challenge

NAR’s vice president of demographics and behavioral insights, Jessica Lautz has commented that “America is facing a housing shortage.” In fact, there was a 5.7% year-over-year fall to 1.64 million in the number of homes on the market in November.

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, are disturbing the reasonable pricing of homes.

Of late, a surge in home prices has been observed, which is eroding the benefits of low mortgage rates and thus affecting sales. The median existing house price rose 5.4% in November to $271,300 from last year's level (marking the 93rd straight month of year-over-year price gain).

Homebuilder ETFs in View

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

iShares U.S. Home Construction ETF ITB — up 44.8% 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 $1.12 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Not Santa, Trade Will Rule This December: ETFs to Your Rescue).

SPDR S&P Homebuilders ETF XHB — up 38.4%

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 $813.3 million. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (read: 6 Trade-Proof Sector ETFs to Follow if No Deal is Cracked).

Invesco Dynamic Building & Construction ETF PKB — up 39.1%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.2% share. It has amassed assets worth $110.2 million. Expense ratio comes in at 0.60%. It is a Zacks #3 Ranked ETF with a High risk outlook (see: all the Materials ETFs here).

Looking Forward

After three rate cuts in 2019, the Fed has hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector as lower borrowing costs are making new houses more affordable. In fact, mortgage rates are currently at a low, going by historical standards. Per Freddie Mac, the average rate on a 30-year, fixed-rate mortgage was 3.73% as of Dec 12, and compares favorably with 4.94% in November 2018.

Moreover, residential investment regained momentum in the third quarter after shrinking for six consecutive quarters.

Furthermore, the upbeat U.S. homebuilders sentiment data for December has cheered investors. The metric has scaled to the highest level since June 1999. Moreover, the data on U.S. housing starts and building permits have been encouraging.

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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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