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Weak US Existing Home Sales in September: ETFs in Focus

Sweta Jaiswal, FRM

After rising for two straight months, sales of existing homes in the United States fell more than expected in September. Lack of availability of affordable homes might have been the main reason for the decline. In fact, existing home sales declined across all the four regions in September (Midwest 3.1%, Northeast 2.88%, South 2.1% and West 0.9%).

A Glimpse at the NAR’s Data

NAR’s data showed a 2.2% drop in existing homes sales to a seasonally adjusted annual rate of 5.38 million units in September. This compares with an upwardly revised 5.50 million units in August. Moreover, it disappoints when compared with Reuters economists’ forecast of a 0.7% decline to 5.45 million units. However, existing home sales rose 3.9% year over year (read: Global Real Estate ETFs Scaling Higher: Here's Why).

Moreover, in comparison to 4.4 months needed to deplete the supply of homes in the year-ago period, the latest data suggests that only 4.1 months will suffice.

Supply a Challenge

Builders continue to bear the brunt of rising development and construction costs apart from trade woes. They are still grappling with regulatory burdens, deficit of lots and lack of skilled labor. These hurdles are affecting supply, which in turn, is disturbing the reasonable pricing of homes. In fact, there was a 2.7% year-over-year decline in inventory levels to 1.83 million homes in September. Notably, inventory levels dropped for the fourth straight month.

The shortage in the supply of homes is leading to a rise in prices, thereby compromising affordability. In fact, seeing a rise in price for the 91st straight month, the median existing house price rose 5.9% year over year to $272,100 in September.

Homebuilder ETFs in Focus

Against the backdrop, let’s take a look at some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 32.4% year to date

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.40 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees and trades in a hefty volume of around 2.1 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Top-Ranked Sector ETFs to Buy for Q4).

SPDR S&P Homebuilders ETF XHB — up 24.1%

A popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $788.6 million and trades in average volume of around 2 million shares a day. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High risk outlook (see: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB — up 27.6%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.4% share. It has amassed assets worth $115.9 million and sees lower volume of around 15,000 shares per day on average. Expense ratio comes in at 0.60%. It is a Zacks #3 Ranked ETF with a High risk outlook (read: An ETF Area That Excelled in September).

Looking Forward

The latest data on U.S. housing starts was also disappointing. The metric declined 9.4% in September to a seasonally adjusted annual rate of 1.256 million units. The figure lags  analysts’ expectations of 1.320 million units, per a Reuters’ poll. The decline was largely due to weak construction in the multi-family housing segment. However, single-family home construction grew for the fourth consecutive month.

Meanwhile, the Fed cut interest rates for the second time at the FOMC meeting in September 2019. When interest rate drops, mortgage rates decline, making real estate or refinancing mortgages more affordable. This, in turn, leads to higher home sales. Moreover, the market is expecting another Fed rate cut soon, which might provide some strength to the U.S. housing market.

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iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
 
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