After A Stellar 2019, Housing ETFs Set For A Sturdy 2020

After a superb 2019, things are looking great for the U.S. housing market in 2020. The industry has greatly benefited this year from low rates, solid earn corporate earnings and lack of direct correlation with the U.S.-China trade scenario. As a result, iShares U.S. Home Construction ETF (WA:ITB) breezed past the S&P 500 (up 26.2%) this year (as of Dec 13, 2019) (read: Bet Big on Housing Earnings With These ETFs).

Let’s take a look at how things are shaping up for 2020.

Affordable Mortgage Rates

Weekly average of the 30-year fixed mortgage rates as of Dec 12, 2019, was down 0.90 bps from the prior year to 3.73%, according to data from mortgage finance agency Freddie Mac. The Fed has cut rates thrice this year and gave hints of no hike in 2020.

Low mortgage rates have worked wonders for housing stocks this year. With the Fed being dovish, this rate-sensitive sector has every reason to outperform (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine).

Upbeat Economic Data

Decent economic fundamentals are fueling growth in the sector. Jobs data deserves a special mention. In November, U.S. employers added 266,000 new jobs, after an upwardly revised 156,000 gains in October. The latest number beat market expectations of 180,000. It was the highest gain in payrolls since January (read: 5 Sector ETFs to Win After Robust November Jobs Data).

Notably, Consumer Expenditure Survey done by Bureau of Labor Statistics in 2017 showed that housing takes the major chunk (33%) of the average annual spending. So, an almost 50-year- low unemployment level and steady wage growth bode well for the homebuilding sector.

Trade Deal to Lower Surging Costs

Investors should also note that higher operating costs make homes more expensive, which is deterring entry-level buyers. According to the NAHB, the U.S.-China trade war has affected $10 billion worth of goods used in the homebuilding industry. Apart from costs, the homebuilding sector is not that dependent on China. With a phase-one trade deal cut between the duo, we might see some decline in raw material costs (read: 6 Trade-Proof Sector ETFs to Follow if No Deal is Cracked).

Millennials’ Home Buying Spree

Millennials have overtaken baby boomers in U.S. population. A research house pointed out that immigration added “more population to this group than any other” and the millennial population is likely to jump to 76.2 million in 2036.

Notably, this population is currently driving the homebuying market. In 2018, millennials made up the largest chunk of home buyers at 37%. About 33% of Taylor Morrison homebuyers are now millennials, up from 20% five years ago. Toll Brothers CEO Doug Yearley is betting big on this generation, contribution from which will grow in the coming days. This is especially true given that income growth among young adults has been solid (read: Ride the Millennial Wave With These ETFs).

Solid Zacks Ranks

The homebuilding industry belongs to a favorable Zacks industry (placed at the top 20% of 250+ industries). Most of the homebuilding stocks like D.R. Horton (NYSE:DHI) , PulteGroup (NYSE:PHM) , Meritage Homes (NYSE:MTH) and M/I Homes Inc. (NYSE:MHO) carry a Zacks #1 (Strong Buy) or 2 (Buy).

ETF Exposure

Housing ETFs mainly include SPDR S&P Homebuilders ETF (NYSE:XHB), iShares ITB and Hoya Capital Housing ETF (HOMZ). DHI holds the first spot in the 45-stock ITB, with a 13.44% weight, and the third position in the 35-stock XHB, with 4.68% exposure. HOMZ has, however, a 1.65% allocation to the stock. PulteGroup gets 7.6% of ITB, 4.8% of XHB and 1.6% of HOMZ.

Bottom Line

Having said all, we would like to note that pressure on inventory and rising prices are bothering the space. The median house price was 6.2% higher in October from last year's level. At October's sales pace, 3.9 months were enough to clean up the inventory, down from 4.3 months a year ago. This led some buyers out of the market. Still, things in the homebuilding space are not as bad as feared. Upbeat earnings performance, low rates and solid Zacks Ranks make housing ETFs compelling buys right now.

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