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Can Solid Confidence & Rally in Housing ETFs Last Ahead?

Sanghamitra Saha
·4 min read

The U.S. housing market has been in the pink in the past six-month period despite the coronavirus crisis. The favorable operating backdrop and upbeat earnings have been propelling the space. The sales scenario has been robust (read: Tap Homebuilding ETFs On Upbeat Earnings & Vaccine Hopes).

Amid this circumstance, builder confidence in the construction market for single-family homes jumped to its “third record high in as many months.” “Historically low mortgage rates, favorable demographics and an ongoing suburban shift for home buyer preferences have spurred demand and increased new home sales by nearly 17% in 2020 on a year-to-date basis,” said NAHB Chairman Chuck Fowke, quoted on CNBC.

Overall builder sentiment hit 90 on the monthly National Association of Home Builders’ Wells Fargo Housing Market Index. Anything above 50 indicates as a positive. Last November, the index was at 71. Notably, in April, builder confidence was as low as 30 hurt by the pandemic.

Out of the three components of the builder’s sentiment index, current sales conditions rose 6 points to 96. Sales expectations in the next six months gained 1 point to 89 and buyer traffic increased 3 points to 77. Lack of inventory in existing home sales have been fueling the sector.

Can the Upbeat Momentum Last?

“Though builders continue to sign sales contracts at a solid pace, lot and material availability is holding back some building activity. Looking ahead to next year, regulatory policy risk will be a key concern given these supply-side constraints,” said NAHB Chairman Chuck Fowke, as quoted on CNBC.

Moreover,the NAHB’s chief economist, Robert Dietz indicated that “affordability remains an ongoing concern, as construction costs continue to rise and interest rates are expected to move higher as more positive news emerges on the coronavirus vaccine front,” the CNBC article noted.

Still, we believe that the full return to normalcy even with vaccines (as Pfizer and Moderna indicatedrecently that their vaccines have proved more than 90% effective in preventing the coronavirus in respective clinical trials) will take time. This, in turn, will keep economies and markets somewhat unsteady and would keep rise in bond yields in check.

Meanwhile, the coronavirus outbreak has made the work-from-home option a big hit. Companies now will likely be offering the option permanently with more ease. So many people will now continue to be moving to suburban areas to avoid high expenses involved in a dense and expensive city. Suburban areas offer more affordable homes. This is especially true given the highly pricier city homes may be discarded amid falling affordability.

Millennial-led demographics is another reason to remain optimistic about the sector. Investors should note that millennials have overtaken baby boomers in the U.S. population. In 2020, millennials are expected to buy the majority of real estate in the United States, per a report from Realtor.com, quoted in a CNBC report issued in February.

The above-said factors indicate the rally in housing ETFs will remain steady in the near term, if not great. Against this backdrop, below we highlight a few housing ETFs that could be tapped for gains.

ETF Plays

iShares U.S. Home Construction ETF ITB – Up 4.1% Past Month (as of Nov 16, 2020)

Expense Ratio: 0.42%; Dividend Yield: 0.42%

SPDR S&P Homebuilders ETF XHB – Up 8.8% Past Month

Expense Ratio: 0.35%; Dividend Yield: 0.71%

Hoya Capital Housing ETF HOMZ – Up 10.6% Past Month

Expense Ratio: 0.30%; Dividend Yield: 1.37%

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
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