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ETFs to Pick as New Home Sales Surge on Falling Rates

Sweta Jaiswal, FRM

The latest new home sales data for August is encouraging. According to data provided by the Commerce Department, new home sales rose 7.1% to a seasonally adjusted annual rate of 713,000 units in the month. This compares favorably with July’s sales pace that was revised higher to 666,000 units from the previously reported 635,000 units. Moreover, the metric beat Reuters economists’ forecast of a 3.5% rise to 660,000 units in August. Year over year, new home sales rose 18% (read: Is it the Right Time to Invest in REIT ETFs? Let's Find Out).

New home sales rose 6% in the South and 16.5% in the West in August. Meanwhile, sales declined 5.9% in the Northeast and were down 3.0% in the Midwest.

Moreover, in comparison to 5.9 months needed to deplete the supply of homes in July, the latest data suggests that just 5.5 months will suffice at the current pace. However, August saw a 1.2% decline from July in the number of new homes in the market, which came in at 326,000. In fact, around 63% of the houses sold in August were either under construction or yet to be built. Also, the median new home price in August was $328,400, up 2.2% year over year.

Declining Mortgage Rates Driving the Upside?

It is widely believed that declining mortgage rates have helped the residential real estate sector as lower borrowing costs are making new houses more affordable. Per Freddie Mac, the average 30-year fixed mortgage rate has declined around 120 basis points from 2018’s highs to an average of 3.73%. Also, the Federal Reserve has cut interest rate by 25 basis points to the range of 1.75-2% for the second time at the FOMC meeting in September. Meanwhile, investors are optimistic that the Fed will announce more interest rate cuts this year (read: Dividend ETFs to Grab as Fed Cuts Rates Once Again). 

ETFs to Snap Up

Given the improving housing market conditions, it will be prudent for investors to park money in some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 42.7% 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 $1.27 billion, it holds a basket of 45 stocks, heavily concentrating 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: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders ETF XHB — up 33.7%

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 $662.6 million. 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) (read: Ride the Millennial Wave With These ETFs).

Invesco Dynamic Building & Construction ETF PKB — up 36.8%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.15% share. It has amassed assets worth $110.9. Expense ratio for the fund is 0.60%. It is a Zacks #3 Ranked  ETF with a High risk outlook (read: ETF Winners Amid Half-Hearted Response to Fed's Rate Cut).

Conclusion

The NAR’s data for existing-home sales reflects improving housing market conditions. Moreover, the recent favorable data shows that U.S. home construction soared to more than a 12-year high in August. U.S. housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units, the highest since June 2007. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), the builder confidence rose to 68 in September compared with an upwardly-revised 67 in August, 65 in July and another 67 a year ago. In fact, improving domestic economy conditions, rising home buyers’ confidence in economic growth and favorable demographic changes are likely to drive demand in the near term as well.

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