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Forget Low Home Sales, Bet on ETFs as Loan Applications Rise

Sanghamitra Saha
·4 mins read

Existing home sales in the United States plummeted 9.7% in May. Economists polled by Reuters had forecast that existing home sales would fall 3% to a rate of 4.12 million units in May. It was the third straight monthly decline. The National Association of Realtors said that the monthly decline brought sales down to a seasonally adjusted annual rate of 3.91 million, the most sluggish clip since a home buyers tax credit expired in October 2010.

Sales fell in all regions of the country, with the biggest decline noticed in the Northeast where virus infections were remarkable high. The slump in existing home sales reflected closings on contracts signed in March and April, when the almost entire country was under lockdown.

What Lies Ahead?

Things don’t look that bad for the future. With applications for home loans soaring to an 11-year high in recent weeks amid record low mortgage rates, May probably marked the bottom for the existing housing market. Data last week showed a strong bounce back in building permits in May. But nearly 20 million people are unemployed. This triggers slight cause for concern.

Amid tight supplies, the median existing house price rose 2.3% from a year ago to $284,600 in May. However, that was the smallest gain since February 2012. Though single-family home prices increased, the median condominium price fell. Subdued price growth along with low mortgage rates should bode well for home sales. First-time buyers made up 34% of sales in May, down from 36% in April but up from 32% a year ago.

Builder sentiment soared a prominent 21 points in June to 58, the largest monthly increase ever in the National Association of Home Builders/Wells Fargo Housing Market Index. Any reading above 50 indicates a positive market. In April, it nosedived a record 42 points to 30.

Of the index’s three components, current sales conditions surged 21 points to 63. Sales expectations in the next six months rose 22 points to 68. Buyer traffic more than doubled from May to June, from 22 to 43. Mortgage applications to purchase a newly built home soared 10.9% year over year in May.

“Although demand certainly dropped in March and April due to the crisis, supply dropped even more, and has thus far kept home prices from declining,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association in Washington. They expect that home price growth will pick up over the summer due to inadequate supply levels.

Upbeat Earnings

Also, we had a better-than-expected quarterly earnings report from one of the nation’s largest public homebuilders, Lennar Corp. (LEN) last week. Chairman Stuart Miller said the company had stopped its new home starts and halted purchasing land in March.

The company reported quarterly earnings of $1.65 per share, handily surpassing the Zacks Consensus Estimate of $1.29 by 27.9%. Also, the reported figure jumped 27% from $1.30 in the year-ago quarter.

 

Revenues of $5.29 billion missed the consensus estimate by 0.03%. The reported figure also decreased 5% year over year.

How to Play the Likely Stabilization in Housing Market

Overall, the latest existing sales reports did not leave any adverse impact on housing stocks and ETFs. iShares U.S. Home Construction ETF ITB and SPDR S&P Homebuilders ETF XHB added more than 1% on Jun 22. The Hoya Capital Housing ETF HOMZ too added 0.24% on the day. The funds added 72.3%, 68.9% and 53.7% in the past three months (as of Jun 22, 2020) (read: 5 Sector ETFs Beating the Market in Q2).

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SPDR SP Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
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