Hot Housing ETFs To Buy Now

Discontinuing the downcast April mood, U.S. new home sales rebounded in May. In fact, sales jumped 2.9% to a seasonally adjusted annual rate of 610,000 May 2017 from an upwardly revised 593,000 in April.

The May data came in better than economists’ expectations of 597,000. The figure grew 8.9% year over year. Not only this, the March figure was also upwardly revised by 2000 units to 644, 000, marking the highest level since October of 2007, as per tradingeconomics.

Since new home sales constitute about 10% of all home sales per Reuters, we need to take a look at existing sales too before being bullish on the sector. Existing home sales grew 1.1% sequentially to a seasonally adjusted annual rate of 5.62 million in May 2017, after a downwardly revised 5.56 million in the prior month and breezing past market expectations of a 0.5% decline.

Lower inventory is basically pushing up prices. But buyers were not dissuaded by all-time high prices. Less building permits were issued in the U.S. in May, and housing starts also declined. In fact, building permits touched the lowest level since April 2016 while housing starts plunged to an eight-month low in May, as per Reuters.

Still, a stable job market, rising wages and still-lower mortgage rates are helping consumers to be confident on homebuying. Several key economic readings came in somewhat soft, leading to talks that the Fed may follow a slower policy tightening trajectory in the days to come.

What Lies Ahead for Housing ETFs?

First, plenty of positives for the sector are loitering around. Rates remained low with mounting concerns over whether the Fed will be able to hike interest rates again later this year given a soft inflationary outlook. As of now, the view is mixed (read: Forget Rate Hike, Bet on These 6 REIT ETFs to Scoop Up Gains).

But even if the Fed enacts its last rate hike of 2017, it would likely be toward the end and not more than 25 bps. This much of tightening is viewed as easily digestible by the market. This in turn will favor the rate-sensitive housing sector. Lower mortgage rates drove home buyers up in recent times (read: Surprise ETF Winners Post Fed Hike).

The monthly average commitment rate was 4.01% in May 2017, up from 3.60% noticed in the year-ago period but way below than the high of 18.45% noted in October 1981, as per freddiemac. In fact, the rates are still lower than the levels seen before the financial crisis in 2007-2008 when they used to hover within 5.8% to 6%.

Though job growth lost momentum in May, it is still steady and wage gains are being noticed. The unemployment rate declined to the 16-year low level of 4.3% and average hourly earnings ticked up 0.2% bringing the year-over-year wage growth to 2.5%, a lot better than the previous years. This should give a lift to household disposable income and household net worth and in turn boost home buying (read: 4 ETFs Set to Gain on Dismal May Job Data).

Yes, low inventory is still an issue for the housing sector which is why prices shot up amid higher demand. But we believe that the supply scenario should improve ahead given an increase in buying.

ETFs to Tap

If you believe that the economy will pick up and the housing market will recover in the coming days, you can bet on SPDR S&P Homebuilders (NYSE:XHB) ETF XHB and iShares U.S. Home Construction ETF (WA:ITB) with a Zacks ETF Rank #1 (Strong Buy). You can also consider PowerShares Dynamic Building & Construction Fund PKB with a Zacks ETF Rank #2 (Buy) (read: 5 Millennial Friendly ETF Investing Ideas).

Bottom Line

The homebuilding sector may have slackened a bit in early 2017, but seems to be firmly on course. So, one could definitely take advantage of the latest rebound in the housing market to cash in on long-term opportunities in it.

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