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Solid Data Drives Housing Stocks and ETFs Higher

Sweta Killa
MEET vs. WDAY: Which Stock Is the Better Value Option?

The housing market appears to have regained its momentum  in 2018 with new home construction rising to the highest level since October 2016 and building permits at 10½-year high in January.

U.S. housing starts climbed 9.9% to a seasonally adjusted annual rate of 1.326 million homes. This represents the second highest level since the recession, following the financial crisis and easily exceeded the 1.24 million forecast by economists polled by MarketWatch. New construction was driven by a solid rebound in single-family houses, which rose 3.7%, and a surge in apartments and condominiums, which shot up 19.7% - the biggest increase since December 2016 (read: 4 Sector ETFs to Play Q4 Revenue Growth).

Meanwhile, new applications for building permits, a construction bellwether for the coming months, rose 7.4% to an annual rate of 1.396 million - the highest level since June 2007.

The data released early last week also showed that builders are optimistic about the outlook for housing. This is especially true as homebuilder confidence last month  hovered near the highest level since 1999 as indicated by the National Association of Home Builders/Wells Fargo sentiment index. Additionally, the gauge of future sales expectations has reached a post-recession high, suggesting that the demand for homes will remain strong in the months ahead.

The upbeat data has spread optimism in the homebuilding space, propelling stocks higher. Hovnanian Enterprises HOV, NVR Inc. NVR and Beazer Homes BZH stole the show, gaining 5.7%, 4.3% and 3.6%, respectively. The homebuilder ETFs space also witnessed encouraging trading, with iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB and PowerShares Dynamic Building & Construction Fund PKB rising 1.3%, 0.5% and 0.8%, respectively on the day (see: all the Materials ETFs here).

What Lies Ahead?

This seems to reverse the bearish trend seen in the space so far this year. Investors lost interest in these ETFs as ITB shed $541.2 million in capital, followed by outflows of $223.2 million for XHB and $10.9 million for PKB, per etf.com. The trio is down 5.6%, 3% and 4.9%, respectively on a year-to-date  basis.

Investors should  cash in on the beaten down prices and buy these ETFs, given that the trio has a Zacks Rank #2 (Buy) with a High risk outlook. This is because the ongoing job creation, wage gains, accelerating household formations and fewer existing home inventories will continue to fuel growth.

However, shortage of both labor and houses are pushing up the cost of materials and in turn home prices, discouraging people from buying homes. With higher number of new construction, price pressure will likely ease in the coming months. Per the latest data from CoreLogic, home price is expected to rise 4.3% by the end of this year albeit at a slower pace compared to a 6.6% year-over-year increase in 2017 (read: Will Rising Home Prices Hurt Housing ETFs in 2018?).

Mortgage rates are also creeping up with the 30-year fixed mortgage average rate rising to the highest level since April 2014 to 4.38% last week from under 4% at the start of the year. This is nevertheless half the 30-year average rate of nearly 8% over the past 45 years, suggesting that the rates are still at historic lows. Further, the homebuilder industry has a solid Rank in the top 7%, suggesting outperformance in the months to come.

Investors seeking large profits in a short span could also take a look at the leveraged play –Direxion Daily Homebuilders & Supplies Bull 3x Shares NAIL - which offers triple exposure to the index of ITB (read: 7 Top-Performing Leveraged ETFs of 2017).

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Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
NVR, Inc. (NVR) : Free Stock Analysis Report
SPDR-SP HOMEBLD (XHB): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
DIR-D HB&SP BU3 (NAIL): ETF Research Reports
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