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Is it Wise to Buy Housing ETFs Right Now?

Sweta Jaiswal, FRM
·4 mins read

Following the disappointing homebuilders confidence report in March, the latest data on sales of the previously-owned U.S. homes looks encouraging. The National Association of Realtors (NAR’s) data showed a 6.5% rise in existing homes sales to a seasonally-adjusted annual rate of 5.77 million units in February (the highest since February 2007). Moreover, the metric beats Reuters economists’ forecast of a 0.7% rise to 5.50 million units. Furthermore, existing home sales rose 7.2% year on year (read: Are ETFs in Trouble as Homebuilders Confidence Drops in March?).

Accounting for about 90% of U.S. home sales, existing home sales were up in all the regions except for a 4.1% decline in the Northeast.

However, it is worth noting here that the data reflects numbers that include contracts signed in December and January before any impact of the coronavirus pandemic on the U.S. economy.

Coronavirus & the U.S. Housing Market

The coronavirus outbreak shows no signs of slowing down with around 32,149 confirmed cases in the United States and a death toll of 400. Also, the coronavirus-led market rout continues in the United States. Moreover, the job market is expected to be severely hit as Americans are increasingly filing claims for unemployment benefits. Growing social distancing efforts are also expected to have adverse impacts on homebuyer interests. Resultantly, a fall in buyer traffic is being observed with properties getting delisted. Per a CNBC article, an analyst at Capital Economics believes that sales will plunge 35% annually. However, measures taken by the Federal Reserve and the government to fight the pandemic might provide some support to the U.S. housing market (read: Coronavirus Panic to Send Economy Into Recession: ETF Picks).

Lean Housing Inventories: Challenges Remain

Builders continue to bear the brunt of rising development and construction costs along with lack of skilled labor. These are affecting supply, which in turn, is disturbing the reasonable pricing of homes. In fact, there was a 9.8% year-over-year fall to 1.47 million in the number of previously-owned homes in the market this February.

Of late, a surge in home prices has been observed, which is eroding the benefits of low mortgage rates and thus affecting sales. The median existing house price rose 8% in February to $270,100 from the prior-year level.

Moreover, in comparison to the 3.6 months needed to deplete the supply of homes in last year, the latest data suggests that only 3.1 months will suffice at February’s pace. Notably, a six-to-seven-month supply is considered a healthy balance between supply and demand.

Homebuilder ETFs in Focus

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

iShares U.S. Home Construction ETF ITB

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 $625.2 million, it holds a basket of 44 stocks, heavily focused on the top three firms. The product charges 42 basis points (bps) in annual fees. It carries a Zacks ETF Rank #2 (Buy) with a High-risk outlook (read: What Fed Rate Cut? 5 Reasons Why Housing ETFs Are in Trouble).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 34 securities in its basket. It has AUM of $479.1 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook.

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 29 stocks in its basket, with each accounting for less than a 6.58% share. It has amassed assets worth $55 million. Expense ratio is 0.60%. It is a Zacks #2 Ranked ETF, with a High-risk outlook (see: all the Materials ETFs here).

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