Should You Buy Homebuilder ETFs Now?

The year 2020 begun on a good note for the U.S. homebuilding sector. The housing reports in January reflected mostly encouraging data, firming confidence on the sector’s ability to maintain strong momentum. Let’s take a look at the factors that are boosting investor confidence in the sector (read: Homebuilder ETFs Shining in 2020: Will This Continue?).

Low Mortgage Rates

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. Post its recently-held meeting at January-end, Fed kept the interest rate steady though it expressed concerns over weaker U.S. investments and exports. It is widely believed that declining mortgage rates have helped the housing sector as lower borrowing costs are making new houses more affordable.

Fears surrounding the rapid spread of coronavirus are also leading to low mortgage rates. Per Freddie Mac, 30-year fixed mortgage rates declined by 9 basis points to 3.51% as of Jan 30. The rates compare favorably to 4.46% in the year-ago period.

Slew of Encouraging Data Releases

The new U.S. home sales surged to a 13-year high last December. U.S. housing starts spiked 16.9% to a seasonally adjusted annual rate of 1.361 million homes in December, the highest level since December 2006. The uptick was driven by strong activity in the multi-family houses, which increased 32%, marking a 33-year high. Single-family construction was up 11%. Also, there was a 3.6% rise in existing homes sales to a seasonally adjusted annual rate of 5.54 million units in December (the highest since February 2018). This compares favorably with 5.35 million units last November. Moreover, the metric beats Reuters economists’ forecast of a 1.3% rise to 5.43 million units. Furthermore, existing home sales rose 10% year over year (read: Housing ETFs to Gain on Upbeat Sales Data).

Homebuilder ETFs Poised to Gain

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

iShares U.S. Home Construction ETF (WA:ITB) — up 6.9% in the past month

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 $1.31 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 Sector ETFs That Crushed the Market in January).

SPDR S&P Homebuilders (NYSE:XHB) ETF XHB — up 3.5%

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 $817.1 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 4.6%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.53% share. It has amassed assets worth $110.1 million. Expense ratio is 0.60%. It is a Zacks #3 Ranked ETF with a High-risk outlook (see: all the Materials ETFs here).

Caveat

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. Moreover, of late, a surge in home prices has been observed, which is eroding the benefits of low mortgage rates and thus affecting sales.

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