Yahoo Finance Revival in Homebuilders' Market: A Boon for ETFs and Stocks?
A resurgence of optimism has been seen in the homebuilder's market, with builder confidence reaching positive territory for the first time in almost a year, as per the National Association of Home Builders (NAHB)/Wells Fargo housing market index update.
From 50 in May, the index rose to 55 in June, marking a continuous half-year increase in builder sentiment. Several factors contribute to this positive trend, including increased foot traffic from potential homebuyers, a less-hawkish Fed, minimal competition from the resale market, and an improved supply chain.
Notably, most homebuilding stocks like PulteGroup PHM, Toll Brothers TOL, MI Homes MHO and Beazer Homes USA BZH have a Zacks Rank #1 (Strong Buy), while D.R. Horton Inc. DHI has a Zacks Rank #2 (Buy).
Return of Stable Traffic
In 2022, the Fed's aggressive measures against inflation led to a rapid rise in mortgage rates, causing a retreat of homebuyers. However, buyers seem to have accepted the increased borrowing costs this year and have returned to the market.
The increased traffic of prospective buyers has been reflected in the NAHB gauge, which saw a four-point increase in June. The average rate on the 30-year fixed mortgage — the preferred home loan for purchases — was 6.69% last week, slightly up from the 52-week average of 6.26%, per Freddie Mac. However, to attract price-conscious buyers, many builders are offering rates much lower than that through their financing arms.
Impact of Limited Resale Inventory
The increase in mortgage rates has an additional advantage for builders. Higher rates limit the number of homeowners willing to sell their property, which directly benefits new homebuilders by reducing competition from existing homes. This low interest rate lock-in effect is resulting in tight resale inventories and encouraging buyers to focus on new homes.
Sales of new single-family houses in the United States unexpectedly jumped 4.1% sequentially to a seasonally adjusted annualized rate of 683,000 in April 2023, the highest level since March last year, and compared to forecasts of 665,000. No wonder, most renowned companies like D.R. Horton Inc. and KB Home KBH reported upbeat results in the just-concluded earnings season (read: Housing ETFs Up on D.R. Horton's Upbeat Earnings).
Sales Forecasts and Homebuilders' Outlook
Given these positive conditions, most major builders have increased their sales forecasts for the remainder of the year. The NAHB measures for current sales conditions and sales expectations six months from now showed increases in June.
Improving Supply Chain
Another positive aspect for builders is an improving supply chain. With the decreasing costs of lumber and more available hiring options, some companies, such as Lennar Corp. LEN, suggest that the issues regarding supply chain disruptions are largely behind them, per a Yahoo Finance article. However, tight lending standards amid bank failures are causes for concern.
ETFs in Focus
Against the above-mentioned backdrop, investors may tap housing ETFs like iShares U.S. Home Construction ETF ITB and SPDR S&P Homebuilders ETF XHB. ITB and XHB have gained, respectively, 6.4% and 8.5% past month (as of Jun 19, 2023).
Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Toll Brothers Inc. (TOL) : Free Stock Analysis Report
Lennar Corporation (LEN) : Free Stock Analysis Report
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
Beazer Homes USA, Inc. (BZH) : Free Stock Analysis Report
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
M/I Homes, Inc. (MHO) : Free Stock Analysis Report
