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Pending Home Sales Fall in October: Homebuilder ETFs in Focus

Per the National Association of Realtors (NAR), pending home sales decreased by 2.6% in October. Sales are down 6.7% year over year—marking the tenth straight month of annual declines. Additionally, sales of newly built homes fell in the month of October at an annual rate of 12%, per U.S. Census. Pending home sales are seen as a forward looking indicator for housing markets. In September, there was a modest rise of 0.5% in pending home sales.

NAR’s Chief Economist Lawrence Yun blamed higher mortgage rates for the drop in sales numbers and believes that interest rates are going to continue increasing further. However, Yun believes that pending sales will rise in the long term, despite short-term fluctuations. In October, Northwest was the only region to gain (1.7%) while Midwest, South and West saw a drop of 1.8%, 1.1% and 8.9% in sales, respectively.

The average 30-year fixed mortgage rate is up by one percentage point from a year earlier and is hovering around the seven-year high of 4.94%.  Higher mortgage rates have affected the affordability of houses and enthusiasm among prospective buyers. The Fed’s decision of reducing the size of its balance sheet and raising short-term rates for loan have led to increased mortgage rates (read: Odds for December Fed Rate Hike Pretty High: ETFs to Invest).

In addition to mortgage rates, housing markets are also being dented by land and labor shortages. These are leading to higher house prices and tighter inventories. Also, the lag in wage growth is affecting home buyers. On an annual basis, wages rose by 3.1% in the month of October in comparison to trailing housing inflation of 5.5%. Per Danielle Hale, chief economist for Realtor.com, recently released data point toward continued softness in homes sales ahead.

However, there is some respite for the housing markets. On a yearly basis, Denver, Seattle, San Francisco and San Diego saw some of the largest increase in listings for October.  Against this backdrop, we highlight the following homebuilder ETFs in detail (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 47 holdings in the basket, with D.R. Horton Inc DHI occupying the top weight of 13.8%. The fund’s AUM is $859.6 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 Whirlpool Corporation WHR occupies the top position with 5.3% weight. The fund’s AUM is $662.6 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 Tractor Supply Co TSCO (6.4%) is at the top. The fund’s AUM is $148.6 million and expense ratio is 0.58%.

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Whirlpool Corporation (WHR) : Free Stock Analysis Report
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
SPDR-SP HOMEBLD (XHB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
Tractor Supply Company (TSCO) : Free Stock Analysis Report
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