Housing ETFs Jump on Record Increase in Existing Home Sales

hari drack

After being stalled by the coronavirus pandemic, the housing market has again propped up going into the summer season. This is especially true given the latest upbeat data, which showed that U.S. home sales increased the most on record in June buoyed by historically low mortgage rates and pent-up spring […]

After being stalled by the coronavirus pandemic, the housing market has again propped up going into the summer season. This is especially true given the latest upbeat data, which showed that U.S. home sales increased the most on record in June buoyed by historically low mortgage rates and pent-up spring demand as the economy reopens.

Sales of existing homes, which make up about 85% of U.S. home sales, jumped nearly 21% in June to a seasonally adjusted annual rate of 4.72 million units, according to the National Association of Realtors. Though existing home sales fell 11.3% annually, it represents the largest monthly gain since the Realtors began tracking the data in 1968 and a strong rebound after sharp declines in the previous three months.

First-time buyers led to the strength that makes up for 35% of June buyers, higher than 30% in recent months. Existing homes sales increased in all four U.S. regions in June, led by a 31.9% jump in the West. Sales in South surged 26% while it rose 11.1% and 4.3% in Midwest and Northeast, respectively (read: Is It a Right Time to Buy Housing ETFs Now? Let’s Find out). 

The upbeat data has spread optimism into the homebuilder space, propelling the stocks higher. In particular, NVR Inc. NVR has been the biggest winner, climbing 10.7% in yesterday’s trading session. Toll Brothers TOL, KB Homes KBH Lumber Liquidator Holdings LL gained nearly 7% on the day.

Smooth trading has also been felt in the ETF space, with iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB and Invesco Dynamic Building & Construction ETF PKB rising 3.9%, 3% and 1.6%, respectively. These funds have a Zacks ETF Rank #3 (Hold) (see: all the Materials ETFs here).

ITB

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 $1.8 billion, it charges 42 bps in annual fees and trades in heavy volume of around 3.6 million shares a day on average.

XHB

This ETF provides exposure to the homebuilders segment with well-diversified exposure across building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is the most-popular option in the homebuilding space with AUM of $948.3 million and average daily volume of 2.5 million shares. The product charges 35 bps in annual fees (read: 3 Hot Sector ETFs to Tide Over the Coronavirus Crisis in Q3).

PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding 32 well-diversified stocks in its basket. It has amassed assets worth $105 million and sees a lower volume of roughly 25,000 shares per day on average. Expense ratio comes in at 0.60%.

What Lies Ahead?

The surge in housing stocks and ETFs is expected to continue given the slew of upbeat data, which reflects strong momentum in the space. Record low mortgage rates and the Fed’s dovish view are encouraging people to buy more homes and has made refinance cheaper. Per Freddie Mac, the 30-year fixed mortgage average rate slipped below 3% for the first time ever early this month while the 15-year fixed-rate mortgage dropped to 2.48% (read: Mortgage Rates At Record Lows: Buy Homebuilder & REIT ETFs).

A separate report from the Mortgage Bankers Association showed that total mortgage application volume rose 4.1% last week from the previous week. Mortgage applications to purchase a home rose 2% for the week and were 19% higher than a year ago. That is the ninth straight week of annual gains. Meanwhile, refinance application volume was up 5% for the week and was 122% higher than a year ago.

Homebuilder confidence also has been on the rise. The National Association of Home Builders/Wells Fargo Housing Market Index this month now stands at the solid pre-pandemic reading in March before the coronavirus outbreak affected much of the nation.

Moreover, homebuilders are currently well placed, belonging to a top-ranked Zacks industry (placed at top 6% of 250+ industries), suggesting strong outlook. However, labor shortages, rising construction cost and high unemployment amid the COVID-19 pandemic will continue to weigh on the sector.

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