5 Reasons To Like Housing ETFs Despite Inventory Issues

The U.S. housing sector recovery that started in 2009 looks sturdy even after nine years. Single-family housing starts were an annualized 877,000 in January, less than half of 1.8 million recorded in early 2006, according to an article published on barrons.com.

Last month, existing home sales were hurt by a continued shortage of houses that is pushing up prices and discouraging first-time buyers. Yet several market watchers including the chief economist at Moody’s Analytics still have faith in the housing sector.

Notably, U.S. existing home sales marked the biggest year-on-year decline in more than three years in January. First-time buyers made up 29% of transactions in January, down from 32% in December and 33% a year ago. As per economists and realtors, a 40% share of first-time buyers is required for a healthy housing market.

Whatever the case, below we highlight a few factors that could cause a revival in the sector and prices of the concerned stocks.

Spring Selling Season

The housing sector is all set to enter the key spring selling season, which is considered the peak time for home sellers. Normally, the season starts in March and lasts through May-June thanks to warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar starts (read: 5 ETFs to Buy in March & Forget Trade War, Inflation Fears).

Buyers brushed aside fears of sooner-than-expected Fed policy tightening as well as higher home prices. Rather, they are trying to dip their toes in the housing market for as long as the rates remain affordable. A solid job market is doing its bit to drive this segment.

Compelling Valuation

Valuations also look attractive. Homebuilder shares recently traded at 10 times of 2018 profit estimates against the overall market’s P/E ratio of 17, despite the fact that companies are expected to report double-digit earnings growth this year and the next, as per barron’s.com.

An Uptick in Millennial Home Buyers

Millennials are contributing big-time to the housing market recovery with a keenness to buy rather than rent. For the first time in 13 years, 20- and 30-somethings turned out to give solid impetus to the U.S. housing market.

“The number of homes owned by people under age 35 rose to 36 percent during the fourth quarter of 2017 -- up from 34.7 percent over the same period the previous year,” according to the Census Data. As millennials have the prospect of comprising around 75% of the workforce by 2025, the housing sector surely emerges as a long-term bet (read: Millennials ETFs Head-to-Head: MILN versus GENY).

Still-Low Interest Rates

The monthly average commitment rate was 4.33% in Feb 2018, up from 4.17% noticed in the year-ago period but way below the high of 18.45% noted in October 1981, as per freddiemac. In fact, the rates are moderately higher than the annual average of 2017 (3.99%).

According to the chief economist at Moody’s Analytics, “aslong as rates move up to 4.50%, 4.75%, or even 5% because the job market is good and wage growth is improving, it’s no big deal.”

Will Tax Reform Put a Cap on House-Price Growth?

The new tax bill lowers the value of the mortgage interest deduction to $750,000 from $1 million. The policy also “caps at $10,000 the amount that can be deducted for state and local taxes.” While apparently it appears to weight on housing sector, chief economist at Moody’s Analytics believes that “they should weigh on house-price growth.”

The analyst reasons out that there are certain housing markets that rely on taxpayers “who use those tax benefits, which have been capitalized into house prices.” In the absence of these benefits, prices are likely to come down (read: Tax Bill: What ETF Investors Need to Know).

ETFs & Stocks In Focus

Investors should note that the housing stocks belong to a top-ranked Zacks industry (top 44%). Investors can play Zacks Rank #2 (Buy) stocks like Lyon William Homes (NYSE:WLH) and Meritage Corporation (NYSE:MTH) and a Zacks Rank #1 (Strong Buy) stock Beazer Homes USA Inc. (NYSE:BZH) .

Among ETFs, investors’ choices are iShares U.S. Home Construction ETF (WA:ITB) and SPDR S&P Homebuilders (NYSE:XHB) ETF XHB.

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