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Housing ETFs May Not Bloom This Spring: Here's Why

Sanghamitra Saha

Pressure on the U.S. housing market is prevailing even with a dovish Fed and declining mortgage rates. Sales of previously owned houses, which comprises 90% of the U.S. housing market, declined 4.9% to a seasonally adjusted annual rate of 5.21 million in March 2019 from the previous month's 11-month high and compared with market expectations of a 3.8% drop. This marks the 13th year-on-year decrease in home sales in a row.

Sales of single-family homes declined 4.9% to 4.67 million in March, following a 12.6% jump in February, and sales of condos fell 5.3% to 0.54 million, after remaining unchanged in the previous month. Previously, a tight inventory and higher home prices were suspected to stress the housing market. However, of late, slower growth in house prices has been noticed. The median existing house price has increased 3.8% from the year-ago period.

Land and labor shortages in the lower end of the market have been prevalent. At March's sales pace, it would take 3.9 months to consume the current inventory, up from 3.6 months in February. The level is far from a healthy six-to-seven-month supply on hand.

The housing market has, in fact, entered the key spring selling season, which is considered the peak time for home sellers. Normally, the season starts in March and lasts through May-June thanks to a warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar starts. During this peak time, such sales numbers are disappointing.

D. R. Horton Downgraded

If this was not enough, KBW analyst Jade Rahmani downgraded the big housing stock D.R. Horton DHI to market perform. The stock has rallied 34% this year. Pricey valuation, a "choppy spring selling season" and the likelihood of margin pressure in the second half with the home offering mix skewing toward lower-margin entry-level products, led to the downgrade. DHI shares fell 1.6% on Apr 22 (read: Rate Sensitive ETFs to Explode Higher Post Fed Minutes).

ETFs in Focus

Against this backdrop, investors should note that the homebuilding ETF SPDR S&P Homebuilders ETF XHB, which has outperformed (up 25.4%) the S&P 500 (up 16%), may lag momentum. The fund XHB puts 4.78% in DHI stock. The fund shed about 0.8% on Apr 22. Investors should also note that homebuilding stocks come from a bottom-ranked Zacks industry (bottom 13%) (see all Industrial ETFs here).

There is another ETF — iShares U.S. Home Construction ETF ITB — to track the space. D R Horton takes the top spot with about 14.4% exposure followed by Lennar (13.2%). The fund ITB was down 0.9% on Apr 22.

Both funds have a Zacks Rank #4 (Sell) with a High-risk outlook.

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