Will ETFs Suffer as U.S. New Home Sales Decline in September?

Sweta Jaiswal, FRM
·5-min read

The latest new home sales data is a little surprising amid the low interest rates and changing demand patterns in the U.S. housing sector. After four consecutive monthly increases, sales of new U.S. single-family homes declined shockingly in September. Per the Commerce Department data, new home sales declined 3.5% in the last month to a seasonally adjusted annual rate of 959,000 units. This compares unfavorably with August’s sales pace that was revised downward to 994,000 units from 1.011 million units. Moreover, the metric lagged economists’ forecast of a 2.8% rise to a rate of 1.025 million units, per a Reuters poll. Year over year, new home sales rose 32.1% in September. Notably, new home sales are considered a leading housing market indicator since it is counted at the signing of a contract, per a Reuters article.

New home sales, which make up for 12.8% of housing market sales, declined in the Northeast, South and Midwest but, rose in the West. Notably, there was a 3.5% year-over-year rise in median new house price to $326,800 in September, per a Reuters article. Meanwhile, the number of new homes on market in September rose to 284,000 from 282,000 in August.

Is U.S. Housing Market Losing Momentum?

The housing market is continuously dealing with hurdles like rising material prices and labor costs. Loan applications for new home purchases have also declined for four consecutive weeks, per a Reuters article. Rising lumber prices, which have more than doubled since mid-April, can result in further sluggishness in the housing market despite low interest rates. Also, low employment levels and an aggravating coronavirus outbreak may impede momentum of the U.S. housing market. Moreover, rising labor and raw material costs may challenge the availability of affordable homes for buyers and are lengthening constructions times, which may result in a market setback.

Commenting on the hurdles, John Pataky, executive vice president at TIAA Bank in Jacksonville, said that “this month’s new home sales figures indicate that the housing market might be finally losing some steam,” according to a Reuters article.

Meanwhile, the recently-released data on the U.S. builder confidence paints an upbeat picture of the U.S. housing market. Per the monthly per a National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes surged to an all-time high of 85 points in October in comparison to 83 points in September, 78 in August, 72 in July and 30 in April (the lowest since June 2012). Notably, September and October stood out as the first two months with the index surpassing 80. Any reading above 50 is considered positive and signals at improving confidence.

Going on, sales of existing homes in August witnessed a strong pace. According to the U.S. Housing and Urban Development and Commerce Department, total housing starts rose 1.9% to a seasonally-adjusted annual rate of 1.415 million units in September, per a NAHB press release. The reading surpasses August’s downwardly revised figure of 1.388 million units. It lagged analysts’ expectations of 1.457 million units, per a Reuters’ poll. Building permits, a construction pointer for the coming months, jumped 5.2% to an annualized rate of 1.553 million units in September.

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Analysts believe that support from the Federal Reserve is keeping rates at such modest levels. The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties.

Keeping positive expectations from the sector, Andrew Hollenhorst, an economist at Citigroup in New York, has said that “the housing sector should remain supportive of growth at least for the next couple of quarters as strong demand drives new construction,” per a Reuters article.

Homebuilder ETFs That May Keep Gaining

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

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 $2.39 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: Best Stocks & ETFs to Profit from the Red-Hot Housing Market).

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 35 securities in its basket. It has AUM of $1.46 billion. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than a 5.94% share. It amassed assets worth $149.6 million. The expense ratio is 0.60%. The fund is Zacks #3 Ranked, with a High-risk outlook.

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SPDR SP 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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