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ETFs in Focus as New Home Sales Drop Slightly in October

Sweta Jaiswal, FRM

The latest new home sales data for October is a little disappointing. According to data provided by the Commerce Department, new home sales declined 0.7% to a seasonally adjusted annual rate of 733,000 units in the month. This compares unfavorably with September’s sales pace that was upwardly revised to 738,000 units from the previously reported 701,000 units. In fact, September’s figure hit the highest level since July 2007. Meanwhile, Reuters economists’ had forecast a 1.1% rise to 709,000 units in October. Year over year, new home sales rose 31.6% (read: Upbeat Data to Renew Confidence in Homebuilding ETFs).

New home sales, which make for around 11.3% of housing market sales, declined 3.3% in the South and 18.2% in the Northeast in October. Meanwhile, sales rose in the Midwest and the West.

Moreover, in comparison to 5.2 months needed to deplete the supply of homes in September, the latest data suggests that 5.3 months will suffice at the current pace. However, October saw a 0.3% rise from September in the number of new homes in the market, which totaled 322,000. In fact, around two-thirds of the houses sold in October were either under construction or yet to be built. Also, the median new home price in October was $316,700, down 3.5% year over year. Interestingly, new home sales were higher in the $200,000-$400,000 price range, in comparison to those costing below the most usual mark of $200,000.

Current Housing Market Scenario

It is widely believed that declining mortgage rates have helped the residential real estate sector as lower borrowing costs are making new houses more affordable. Per Freddie Mac, the average 30-year fixed mortgage rate presently stands at 3.66% in comparison to November 2018’s highest mark of 4.94%. Also, the Federal Reserve has cut interest rates for the third time at the FOMC meeting in October 2019. Moreover, U.S. homebuilding rebounded in October and permits for future home construction crossed a 12-year high. In fact, October was the second-best month for housing starts so far in 2019. Building permits rose 5% to an annual rate of 1.461 million units last month, the highest since May 2007.

However, the latest data on the U.S. homebuilder sentiment in November displeased investors. The data showed a decline for the first time in five months while staying near the highest level since February 2018 (read: ETFs in Focus as US Homebuilder Sentiment Drops in November).

Meanwhile, some analysts are upbeat on the sector and believe that along with low interest rates, there is a rise in the availability of affordable homes.

ETFs to Snap Up

Given the improving housing market conditions, it will be prudent for investors to park money in some homebuilder ETFs.

iShares U.S. Home Construction ETF ITB — up 51.1% 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 $1.23 billion, it holds a basket of 45 stocks, heavily concentrating on the top two firms. The product charges 42 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

SPDR S&P Homebuilders ETF XHB — up 41.5%

The most 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 $807.4 million. 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 44.8%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket with each accounting less than 5.35% share. It has amassed assets worth $114.4 million. Expense ratio for the fund is 0.60%. It is a Zacks #3 Ranked  ETF with a High risk outlook (read: 5 Sector ETF Winners Amid Small-Cap Earnings Underperformance).

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