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ETFs That Might Suffer as New Home Sales Data Disappoints

Sweta Jaiswal, FRM
·4-min read

After hitting the fastest pace since July 2007 this January, the sales of newly-built homes in the United States disappointed in February. According to data provided by the Commerce Department, sales of new homes declined 4.4% to a seasonally-adjusted rate of 765,000 units in February. It compares unfavorably with the January reading on new home sales that were revised up to 800,000 units, the highest level since May 2007, from the previously-reported 764,000 units. Notably, the economists’ had forecast new home sales decreasing 2% to a pace of 750,000 units (per a Reuters’ poll).

Notably, new home sales climbed 14.3% on a year-over-year basis. Regionally, new home sales dropped 7.3% in the Midwest and 17.2% in the West. Meanwhile, sale were up 38.9% in the Northeast and 1% in the South (read: Is it Wise to Buy Housing ETFs Right Now?).

The previously-released housing sector data was mixed. The National Association of Realtors (NAR’s) data showed a 6.5% jump 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. Meanwhile, the National Association of Home Builders’ (NAHB) monthly confidence index has disappointed in March. Per the monthly NAHB/Wells Fargo Housing Market Index (HMI), builder confidence dropped two points to 72 in March compared with 74 in February.

U.S. Housing Market Conditions

The coronavirus outbreak shows no signs of slowing down, with around 53,000 confirmed cases in the United States and a death toll of 700. Moreover, the job market is expected to be severely hit as Americans are increasingly filing claims for unemployment benefits. It is being expected that Americans filing claims for unemployment benefits will rise to a record 1.5 million or more when last week’s (ending Mar 20) data will be published on Mar 26. Growing social distancing efforts are also expected to have adverse impacts on homebuyer interests. In this regard, chief U.S. economist at Oxford Economics has said that “we expect new home sales to fall more sharply in March and decline nearly 10% in the second quarter.” 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).

Going on, 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.

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 an AUM of $693.4 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 $557.5 million. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 2, with a High-risk outlook (read: Are ETFs in Trouble as Homebuilders Confidence Drops in March?).

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 5.98% share. It has amassed assets worth $61 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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