Rising rates and escalating housing prices are proving to be significant headwinds for the housing sector. Contract signings to purchase previously owned homes plunged for the second month in a row in November. Per National Association of Realtors (NAR) in Washington, index of pending home sales declined 0.7% in November and 7.7% on a year-over-year basis on an unadjusted basis (read: Fed Hikes Rates But Offers Dovish Outlook: ETFs to Play.)
The housing market has been affected by land and labor shortages, resulting in tighter inventories. Pending home sales have declined in six of the last eight months, signaling more trouble for the housing sector. The monthly reading for October remained unrevised at 0.6% decline from the previous month.
In November, pending home sales were up in the West and the Northeast 2.8% and 2.7%, respectively. However, sales declined in the South and Midwest region. Pending home sales declined by 2.3% in the Midwest and 2.7% in the South. Sales in all the four regions were lower on a year-over-year basis.
Per Lawrence Yun, the chief economist of NAR, the recent pullback in contract signings implies more short-term pullback in the housing markets. However, he believes that the recent favorable conditions of mortgage rates have not yet taken effect.
According to mortgage giant Freddie Mac, long-term U.S. mortgage rates declined for the week ended Dec 27 as stocks posted losses and the interest charged on U.S. Treasury notes declined. For the week ending Dec 27, average rate on the benchmark 30-year, fixed-rate mortgage dipped to 4.55% from 4.62% from week ending Dec 20This dip in mortgage rate could cheer potential buyers (read: Mortgage Rates at 2-Month Low: Homebuilder ETFs in Focus).
Economists expect the housing market to struggle again this year. However, healthy state of the economy coupled with the fall in mortgage rates could reignite investors’ interest in this sector. Against this backdrop, we highlight homebuilders ETFs (see: all the Industrials ETFs here):
iShares U.S. Home Construction ETF 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 D.R. Horton Inc DHI occupying the top weight of 13.3%. The fund’s AUM is $788.9 million and expense ratio is 0.43% (read: Housing Market Facing Strong Headwinds: ETFs in Focus).
SPDR S&P Homebuilders ETF 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 Corporation AOS occupies the top position with 4.7% weight. The fund’s AUM is $529.8 million and expense ratio is 0.35%.
Invesco Dynamic Building & Construction ETF 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 Lowe's Cos Inc LOW (5.6%) is at the top. The fund’s AUM is $116.9 million and expense ratio is 0.58%.
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Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
A. O. Smith Corporation (AOS) : Free Stock Analysis Report
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