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Existing Home Sales at 3-Year Low: Homebuilder ETFs in Focus

Zacks Equity Research
Higher demand for residential properties and a strategic redevelopment program will likely aid Mid-America Apartment (MAA) in Q2 amid elevated supply of new units in certain markets.

In December 2018, existing home sales fell to a three-year low, while rise in housing prices slipped to the lowest level in more than six years. Per National Association of Realtors (NAR), contract signings declined 6.4% to a seasonally adjusted annual rate of 4.99 million units last month— the lowest since November 2015 (see: all the Industrials ETFs here).

Sales for November were revised slightly up to 5.33 million units from the previously reported 5.32 million units. Existing home sales, which account for 90% of U.S. home sales, dropped 10.3% on a year-over-year basis.  For 2018 as a whole, existing home sales fell 3.1% from 2017 to 5.34 million units—weakest since 2015.

The median sales price rose 2.9% on an annual basis to $253,600. This was the lowest increase since February 2012. Slowdown in home-price growth is an indication that owners who are struggling to sell their homes are now trimming down prices. Meanwhile, the drop in price increase might infuse some momentum in the market for potential buyers who have been away from the sector owing to escalated prices and fears of a housing price bubble.

From the perspective of inventory, it would take around 3.7 months to sell all homes in the market, down from the 3.9 months last November. Realtors see less than five months of supply as an indication of a tight housing market.

Other Unfavorable Signs

In December 2018, Fannie Mae’s home purchase sentiment index fell to its lowest level in two years. Four out of 10 Americans said that “it’s a bad time to buy a home,” the highest on record since June 2010.

Further, the longest U.S. government shutdown is affecting the housing market. The recent survey conducted by NARhas suggested that some government employees are pulling out of purchase offers, while some are being denied loans due to the absence of wages. Also, some non-government employees are having second thoughts regarding purchases, given the overall concerns and uncertainty in the economy (read: Longest U.S. Government Shutdown: Likely ETF Winners & Losers).

Favorable Signs

Per a survey released by the National Association of Home Builders (NAHB) last week, there is a rebound in homebuilder confidence due to fall in mortgage rates.  The NAHB’s monthly confidence rose two points in January.

U.S. 30-year mortgage rates have declined over the past two months as Fed officials have signaled that the central bank is likely to slow down or even halt rate hikes, given the signs of tightening financial conditions. For the Jan 17 week, 30-year fixed-rate mortgage averaged 4.45%, according to mortgage guarantor Freddie Mac. The rates are presently at a nine-month low. For the week ending Jan 11, purchase mortgage applications rose 9% from the earlier week— the highest level seen since April 2010.

The U.S. stock market has been performing well in 2019,thanks to the development in trade talks and dovish Fed minutes from the December 2018 meet. So, if the mortgage rates stay low and the markets continue to stay robust, the housing sector could record some noticeable gains (read: Will the Rally in Homebuilder ETFs Continue?).

Homebuilder ETFs in Focus

After struggling for most part of 2018 due to rising rate concerns and higher prices, homebuilder ETFs has staged a comeback over the past four weeks (as of Jan 22). iShares U.S. Home Construction ETFITB, SPDR S&P Homebuilders ETF XHB and Invesco Dynamic Building & Construction ETFPKB have returned 11.6%, 12.2% and 12.6%, respectively, over the time period. Below we highlight them in detail:

ITB

This fund tracks the Dow Jones U.S. Select Home Construction Index comprising companies building residential homes, including manufacturers of mobile and prefabricated homes. There are a total of 48 holdings in the basket, with Lennar Corp LEN taking the top weight of 13.4%. The fund’s AUM is $935.1 million and expense ratio is 0.43%. It currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 4 Sector ETF & Stock Picks to Bet on Ahead of Q4 Earnings)

XHB

This fund tracks the S&P Homebuilders Select Industry Index targeting industries like building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is an equal-weighted fund. It comprises 35 holdings and A. O. Smith Corp AOS occupies the top position with 4.9% weight. The fund’s AUM is $640.8 million and expense ratio is 0.35%. It carries a Zacks ETF Rank #4 (Sell) with a High risk outlook.

PKB

This fund tacks the Dynamic Building & Construction Intellidex Index targeting companies providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines and airports. It comprises 30 holdings and Home Depot Inc HD (5.3%) is at the top. The fund’s AUM is $119.0 million and expense ratio is 0.58%. It carries a Zacks ETF Rank #3 with a High risk outlook (read: Pending Home Sales Fall in November: Homebuilder ETFs in Focus).

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The Home Depot, Inc. (HD) : Free Stock Analysis Report
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
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