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US Housing Market Continues to Grow in March: 3 Fund Picks

Zacks Equity Research
·5 min read

One year of the pandemic and Americans are still on the move to low populated areas and suburbs, bumping up demand for single-family homes specifically. Low mortgage rates also help America’s largest generation, the millennials, buy their first homes and enjoy time with their family safely as remote working continues. All the more, housing data (building permits and housing starts) in the past month has shown a northward trend and builders have been optimistic of growth despite the supply side strains. 

Housing Data Outperforms in March

On Apr 16, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly reported  that housing starts jumped 19.4% in March from the previous month. Last month’s rise in housing start was the highest since June 2006 at a seasonally adjusted annual rate of 1.739 million units, surpassing the consensus estimate of 1.618 million units. This significant rise drove housing starts 37% year over year. The report also highlighted that single-family housing starts jumped 15.3% and increased in the Northeast, Midwest and South while numbers fell in the West. The growth was at a rate of 1.238,000, much above the revised February figure of 1.074.

The joint report also showed that building permits came in at 1.766 million in March, above the consensus estimate of 1.750 million. Single-family permits jumped 4.6% last month and at a rate of 1.199 million, higher than February’s revised figure of 1.146 million.

Builders Optimistic About Growth

Supply-side problems, especially rise in lumber price, remain the biggest worry for homebuilders and this in turn in pushing home prices. However, record-low mortgage rates have so far favored buyers, though the economic rebound as the pandemic eases has pushed inflation higher. Rise in inflation also pushed the 30-year mortgage rate to slip below the record low of 3%. According to Freddie Mac data, after jumping to 3.18% in the first week of April, the 30-year fixed mortgage rate slipped to 3.04% for the week ending Apr 15.

Additionally, shortage in semiconductors has delayed deliveries of new appliances, which is making it difficult for builders to deliver smart homes. However, migration to suburbs and lower populated areas has kept demand for homes, especially single-family homes, accelerating. According to Robert Dietz, chief economist for the National Association of Home Builders’ (NAHB), the group is forecasting growth in single-family construction in 2021, even though at a lower rate than in 2020, and much of it is due to the supply-side strains. And the NAHB survey showed that confidence among homebuilders increased to 83 in April amid strong buyer traffic.

3 Mutual Fund Choices

Given the positive data from the housing space, we have shortlisted three real estate mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to grow. Moreover, these funds have encouraging year-to-date (YTD) returns. Additionally, the minimum initial investment is within $5000. We expect these funds to outperform peers in the future.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Real Estate Investment Portfolio FRESX fund aims for above-average income and long-term capital growth, which is consistent with reasonable investment risk. This non-diversified fund invests primarily in common stocks. The majority of FRESX’s assets are invested in securities of companies, principally engaged in the real estate industry and other real estate-related investments.

This Zacks sector – Real Estate product has a history of positive total returns for more than 10 years. Specifically, the fund has returned 8.6% and 4.8% over the past three and five years, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FRESX has an annual expense ratio of 0.74% versus the category average of 1.12%.

MFS Global Real Estate Fund Class R6 MGLRX aims for total return. The fund invests majority of its assets in equity securities of U.S. and foreign real estate-related investments of any size.

This Zacks sector – Real Estate product has a history of positive total returns for more than 10 years. Specifically, the fund has returned 10.7% and 8.2% over the past three and five years, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MGLRX has an annual expense ratio of 0.90%, which is below the category average of 1.21%.

Neuberger Berman Real Estate Fund Class R6 NRREX aims for total return. Additionally, the fund gives importance to capital appreciation and current income. Majority of this non-diversified fund’s assets are invested in equity securities of real estate investment trusts and real estate companies.

This Zacks sector – Real Estate product has a history of positive total returns for more than 10 years. Specifically, the fund has returned 12.3% and 8.3% over the past three and five years, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

NRREX has an annual expense ratio of 0.76%, which is below the category average of 1.12%.

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