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Rising Rate Fears Spoil the Planned Party in Housing ETFs

Sanghamitra Saha
People's United (PBCT) delivered earnings and revenue surprises of -2.94% and -1.47%, respectively, for the quarter ended September 2018. Do the numbers hold clues to what lies ahead for the stock?

Recently released existing and new U.S. home sales data for the month of March deserve a big round of applause. Despite persistently low inventories and a shoot-up in price, both rose and beat market expectations.

Existing home sales in the United States rose 1.1% sequentially to a seasonally adjusted annual rate of 5.6 million in March 2018. It breezed past market expectations of a 0.2% rise to 5.54 million.

And sales of new single-family houses, which make up about 10% of all U.S. home sales,rose 4% from the earlier month to a seasonally adjusted annual rate of 694 thousand, marking a four-month high and beating market consensus of 625 thousand.

At the current pace of sales, existing supplies would be exhausted in 5.2 months, which is no doubt lesser by historical standard, but still steady. So far this year, sales are 10.3% higher than the same phase in 2017 as builders react to robust demand.

Housing Sector Springs

The housing sector normally performs better in 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 warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar. 

Buyers brushed aside fears of higher home prices. Rather, they appeared to have dipped their toes in the housing market for as long as the rates remained affordable. A solid job market played its role in driving this segment. The homebuilding stocks hail from a top-ranked Zacks industry (top 32%) (read: Why Housing Stocks & ETFs Can Have a Spring in Their Step).

Market Impact

However, all these optimisms were marred by the recent spike in Treasury yield as the home building industry is inversely related to interest rates. The short-term, two-year Treasury yield hit a new 2008 high lately while the 10-year benchmark U.S. Treasury yield spiked to 3% on Apr 24 for the first time since January 2014, thanks to the dual prospects of a flurry of new government debt and faster Fed rate hikes. Markets started to assume four rate hikes this year.

As a result, SPDR S&P Homebuilders ETF XHB dropped more than 1.2% despite reporting sound new home sales data on Apr 24 and lost about 1% in the last two days (as of Apr 24). iShares U.S. Home Construction ETFITB retreated about 0.9% on Apr 24 and 0.5% in the last two days (read: 5 ETFs to Play Rising Yields).

What Lies Ahead?

Though rising rates are concerns, rates should go a little higher to spell trouble for the space. The monthly average commitment rate was 4.44% in March 2018, up from 4.20% noticed in the year-ago period but way below than the average of 6.34% noted in recession-stricken 2017, as per freddiemac. Though the industry backdrop is decent, investors can witness panic selling in the near term.

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