What's Driving Housing ETFs Despite Subdued Sales?

Sales of new single-family houses in the United States grew 7% from the previous month to a seasonally adjusted annual rate of 646 thousand in June 2019, after two successive months of a decline compared to market expectations of a 6% rise. But sales for the prior three months were revised down. While overall sales saw a spurt in June, almost all of the increase originated from the West, where sales skyrocketed 50.4%. Lower mortgage rates contributed to the housing sector.

However, this upbeat data point is of little respite as existing home sales make up the major chunk (about 90%) of the U.S. housing market. U.S. existing home sales declined more than expected in June as a supply crunch pushed prices to a record high.

Sales of previously-owned houses in the United States fell 1.7% from the previous month to a seasonally adjusted annual rate of 5.27 million in June 2019, compared to May's 2.9% increase and market expectations of a 0.2% decline. The median house price shot up to an all-time high of $285,700 in June from $278,200 in May and $277,700 a year earlier (read: Will Trump Policies Spell Trouble for Homebuilding ETFs?).

Despite a sluggish sales scenario, housing ETFs like iShares U.S. Home Construction ETF (WA:ITB) and SPDR S&P Homebuilders (NYSE:XHB) ETF XHB have been rising of late. Both funds have added about 28% this year, better than the S&P 500’s 20.5% advancement. In the past three months, XHB’s (3.5%) return topped that of the S&P 500 (3.2%).

Let’s take a look what is driving housing ETFs in recent trading?

Upbeat Earnings

PulteGroup Inc. (NYSE:PHM) , in itssecond-quarter 2019 earnings release this week, reported a top and bottom-line beat. The company is confident about upbeat housing demand for the remainder of 2019, given the recent declines in mortgage rates, and improving economic, employment and demographic trends.

Earnings per share came in at 86 cents, beating the consensus mark of 82 cents by 4.9%. The bottom line, however, declined 3.4% from the year-ago level. Total revenues of $2.49 billion outpaced the consensus mark of $2.48 billion by 0.5% but dropped 3.4% from the year-ago figure of $2.57 billion.

NVR Inc. (NYSE:NVR) reported second-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate. Revenues from the homebuilding segment were almost flat year over year at $1.76 billion. New orders also increased 6% from the prior-year quarter to 5,239 units.

In late June, KB Home (NYSE:KBH) reported quarterly earnings of 51 cents per share, outpacing the Zacks Consensus Estimate of 39 cents by 30.8% but down 10.5% from 57 cents a year ago. Total revenues of $1,021.8 million surpassed the consensus mark of $935 million by 9.3%.

Lennar Corporation (NYSE:LEN) also reported second-quarter results in late June. The company reported quarterly earnings of $1.30 per share, surpassing the consensus mark of $1.13 by 15%. Also, the reported figure jumped an impressive 38.3% from 94 cents reported a year ago. Revenues of $5.56 billion topped the consensus estimate of $5.12 billion by 8.8%. The reported figure also increased 1.9% year over year.

Bets on Fed Rate Cut

The Fed will in all probability cut rates by about 25 bps in its July meeting. The U.S. central bank hasn’t enacted any rate hikes this year so far, unlike 2018. This has resulted in lower mortgage rates, which in turn is benefiting housing ETFs.

Investors should also note that homebuilding stocks come from a top-ranked Zacks industry (top 23%) and a top-ranked Zacks sector (top 25%). It means that though there is substantial sales pressure, homebuilding companies are managing to stay afloat.

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