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Housing ETFs That May Lose as New Home Sales Data Disappoints

Sweta Jaiswal, FRM
·4-min read

The new home sales data for December looks disappointing. Per the Commerce Department, new home sales declined 0.4% to a seasonally adjusted annual rate of 694,000 units in the month. This compares unfavorably with November’s sales pace  that was revised downward to 697,000 units from the previously reported 719,000 units. Meanwhile, Reuters’ economists forecast  a rise of 1.5% to 730,000 units in December. Year over year, new home sales  rose 23%.

New home sales, which make up for 11.1% of housing market sales, declined 15.4% in the South and 11.8% in the Northeast. However, sales surged 31% in the West and 10.1% in the Midwest. Notably, new home sales recorded in the South were the lowest since October 2018.

Moreover, in comparison to 5.5 months needed to deplete the supply of homes in November, the latest data suggests that 5.7 months will suffice at the current pace. Notably, there was a 1.6% rise in the number of new homes in the market in December in comparison to November’s level and totaled 327,000. Interestingly, new home sales were higher in the $200,000-$749,000 price range compared with those costing below the usual mark of $200,000 (read: Housing ETFs to Gain on Upbeat Sales Data).

Supply Constraints Remain

Builders continue to bear the brunt of rising development and construction costs. 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. Accounting for around 3.1% of GDP, housing sector continues to see lean inventories, especially in the lower-priced category of the market.

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 new home price in December was $331,400, up 0.5% year over year.

Looking Forward

Earlier housing reports reflecting U.S. existing home sales surging to near a two-year high in December and housing starts hitting a 13-year peak instill confidence regarding the sector (read: Homebuilder ETFs Shining in 2020: Will This Continue?).

Moreover, after three rate cuts in 2019, the Fed hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector as lower borrowing costs are making new houses more affordable. Per Freddie Mac, the average rate on a 30-year, fixed-rate mortgage was at an average of 3.60%, comparing favorably with 4.94% in November 2018.

Homebuilder ETFs Poised to Gain

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

iShares U.S. Home Construction ETF ITB — up 48.3% in the past year

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 $1.38 billion, it holds a basket of 45 stocks, heavily focused 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: 5 ETFs From Top Industries That Won't Let You Down in 2020).

SPDR S&P Homebuilders ETF XHB — up 35%

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 $812.5 million. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High-risk outlook (read: Sector ETFs to Watch Out for Until Phase-2 Trade Deal).

Invesco Dynamic Building & Construction ETF PKB — up 40%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.45% share. It has amassed assets worth $112.7 million. Expense ratio is 0.60%. It is a Zacks #3 Ranked ETF with a High-risk outlook (see: all the Materials ETFs here).

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