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Housing ETFs to Buy in 2018

Sanghamitra Saha
Best Buy (BBY) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

Heading into 2018, the U.S. housing sector appears sturdy. At least, the latest pool of data gives such cues. Sales of new U.S. single-family homes shot up in October to a 10-year high thanks to strong demand across the country.

Sales of new single-family houses in the United States unexpectedly increased 6.2% to a seasonally adjusted annual rate of 685 thousand in October 2017 from a downwardly revised 645 thousand in September. October marked the biggest percentage gain since January of 1992, while markets expected a 6.0% decline to 625,000 units. Sales surged 18.7% year over year in October.

Since new home sales constitute about 11% of all home sales per Reuters, we need to take a look at existing sales too before being bullish on the sector. Existing home sales rose 2% to a seasonally adjusted annual rate of 5.48 million units in October. This is higher than September’s revised sales of 5.37 million units and Reuters' expectation of 5.42 million units (read: Homebuilder ETFs in Focus on Upbeat Data).

To add to these, housing starts climbed 13.8% to a seasonally adjusted annual rate of 1.29 million homes, the highest level since October 2016. Homebuilder confidence ticked up to a six-month high. 

What Could be the Future Drivers?

Need for reconstruction post hurricanes have probably given a boost to home sales. This along with slightly lower rates should give homebuilder stocks and ETFs a boost. As of Nov 27, 2017, the yield on 10-year Treasury notes was 2.32%, 5 bps down from what we saw at the start of the month.

With chances of a rate hike in December already priced in at the current level, chances of a sharp rise in yields is less likely. Plus, the current Fed chair is worried about subdued inflation. In her one of her last policy meetings she was “very uncertain” about inflation and said that prices could remain subdued for years to come.

The economy may be on the mend as evident from the decent manufacturing, labor market and housing data, but “the PCE core at levels that are as low as they’ve been in a couple of years, means that the yield curve should flatten,” as per an analyst. This should favor this rate-sensitive sector (read: Safe ETFs Win on Fed Minutes).

The monthly average commitment rate was 3.90% in October 2017, up from 3.47% noticed in the year-ago period but way below than the high of 18.45% noted in October 1981, as per freddiemac. In fact, the rates are still lower than the levels seen at the start of the year (4.15%).

Investors should also note that, as per an analyst, “the market is starving for affordable new homes, and builders cannot and will not ignore this hungry market,” quoted on Reuters. With raw material prices rising and shortage of labor being felt, home prices may shoot higher.

So, hurried home buying may be seen in the coming months. After all, the industry should continue to recover in tandem with economic growth. The homebuilder industry has a solid Zacks Rank in the top 18% while the Sector Rank is in the top 6%.  Among Bank of America Merrill Lynch’s most-favored investment ideas, homebuilders have made a place (read: Prepare for 2018 With These ETFs).

ETFs to Tap

If you believe that the economy will pick up and the housing market will recover in the coming days, you can bet onSPDR S&P Homebuilders ETF XHB and iShares U.S. Home Construction ETF ITB. You can also consider PowerShares Dynamic Building & Construction Fund PKB. The funds are up 23.5%, 51.3% and 18.1% in the year-to-date frame (as of Nov 27, 2017).

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SPDR-SP HOMEBLD (XHB): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
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