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September New Home Sales Fall to Near 2-Year Low: ETFs in Focus

Zacks Equity Research
The housing market is one of the few sectors in the U.S. that isn't riding on the country???s growth as rising rates and housing prices are resulting in lower sales, putting housing ETFs in focus.

Rising mortgage rates and higher prices for homes are affecting the country’s housing market as sales for new single U.S. family homes fell to a near two-year low in September. The data for the prior three months were also revised down. Decline in homebuilding, permits and housing completions in September contributed to these low numbers. Sales of previously owned homes were at a three-year low (see: all the Industrial ETFs here).

Per Commerce Department, sales for the month ending September came in at 553,000 on a seasonally adjusted basis — being 5.5% lower than the downward revised August rate of 585,000 as well as 13.2% down from same period a year ago. New home sales have declined for four-straight months now.

New homes available in the market was up 2.8% from August, marking the highest level since January 2009. However supply is nearly half of what it was during the housing market boom in 2006.

Rising rates are proving to be a significant headwind for the sector. The Fed already has hiked rates thrice this year and another one is expected in December. “The Fed’s rising interest rates may be more harmful for economic growth than they thought, chiefly because of its effect on long-term interest rates and hence mortgage rates,” said Chris Rupkey, chief financial economist at MUFG.

In early October, average 30-year fixed home loan rate hit 5.05% — the highest since February 2011. “The recent rise in mortgage rates has been a strong enough headwind to slow home price appreciation in many markets, even hot markets like Los Angeles. Affordability was already becoming an issue in these markets, and higher mortgage rates caused those markets to reach an affordability tipping point that pushed a critical mass of potential homebuyers out of the market,” said Daren Blomquist, senior VP at ATTOM Data Solutions (read: Trump's Approval Rises Before Midterms: ETFs to Lose/Gain)

Hurricane Florence had an impact on the Southern region, with home sales declining 1.5% for the month to 318,000. Numbers in the Northeast were at their lowest levels since April 2015. There was a 12% fall in the western region with the Midwest seeing a 6.9% gain. Nearly two-third of the houses sold last month were either under construction or yet to be built.

This sector is supposed to do well in a strongly performing economy. The labor market is steady with unemployment levels at a 49-year low and wages increasing in recent months. However, expensive home loans and higher housing prices have outweighed the labor market, resulting in affordability concerns for some first-time buyers (read: Shrug Off Rate Fears, Consumer Staples ETFs Are on a Tear).

Per the Federal Housing Finance Agency report published last week, home price index rose 6.1% in the year to August. Slack in demand caused housing inflation to decline from its peak of 7.7% in February but still stay above the annual wage growth, which is below 3%.

Housing ETFs have been performing poorly this year with iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB and Invesco Dynamic Building & Construction ETF PKB losing 32%, 25.8% and 27.7% year to date. Below we highlight these ETFs:

ITB

This fund tracks the Dow Jones U.S. Select Home Construction Index. There are a total of 47 holdings in the basket. AUM is $914.1 million and the expense ratio is 0.43%. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

XHB

This fund tracks the S&P Homebuilders Select Industry Index. It is an equal-weighted fund. There are 35 holdings in the basket. AUM is $609.8 million and expense ratio is 0.35%. It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

PKB

This fund tacks the Dynamic Building & Construction Intellidex Index. There are 30 holdings in the basket. AUM is $152.5 million and expense ratio is 0.58%. It has a Zacks ETF Rank #3 with a High risk outlook.

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