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Will Housing ETFs Gain on Soaring Existing Home Sales?

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The latest existing home sales data has pleased investors. Notably, the pandemic-hit 2020 saw existing home sales reach the highest level since before the Great Recession. This was highlighted in the National Association of Realtors’ (NAR) report, which also showed a 0.7% month-over-month rise in existing homes sales to a seasonally-adjusted annual rate of 6.76 million units in December. Further, existing home sales rose 22.2% year over year. Total home sales volume for 2020 ended at 5.64 million units, up 5.6% from 2019.

First-time buyers accounted for 31% of sales in December, flat year over year but down compared with 32% in November 2020. Existing homes sales increased in the Northeast and South by 4.5% and 1.1% month over month, respectively, in December. However, sales in the Midwest remained flat in December with the West seeing a 1.4% decline from November’s figure.

Commenting on the housing market scenario, Lawrence Yun, NAR’s chief economist, reportedly said, “home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic. What's even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market."

Moreover, the median existing-home price for all housing types was $309,800, up 12.9% year over year in December, marking the 106th consecutive month of year-over-year gains.

The U.S. housing sector impressed investors with impressive performance amid the tough pandemic times. However, U.S. homebuilder confidence in the market for single-family homes surprisingly declined in January. It seems as if the space is now rattled by the aggravating pandemic and rising lumber prices.

Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at  83 points in January in comparison to 86 in December, 90 in November, 85 in October and 30 in April (the lowest since June 2012). The metric also lagged economists’ expectations of remaining flat at 86, per a Reuters’ poll. However, the reading still looks strong. Any reading above 50 is considered positive and signals at improving confidence.

Meanwhile, the release of encouraging data from the U.S. housing market highlights the sector’s strength even amid soaring coronavirus cases. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts rose 5.8% to a seasonally-adjusted annual rate of 1.669 million units in December. The reading surpassed analysts’ expectations of 1.560 million units, per a Reuters’ poll. For 2020, housing starts came in at 1.380 million, up 7.0% from the year-ago figure.

Current Housing Market Scenario

Low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Analysts believe that support from the Federal Reserve is keeping rates at such modest levels. The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties. Notably, people are shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources.

President Joe Biden’s proposed new policy can aid new homebuyers. Notably, first-time buyers are defined as those who haven’t purchased a home in at least three years. Biden offered a $15,000 first-time homebuyer tax credit that can be utilized to make down payments, per a CNBC article. If sanctioned, this incentive can make homes affordable, much like the $7,500 first-time homebuyer credit established under the Obama administration through the Housing and Economic Recovery Act.

Meanwhile, rising lumber prices, material and labor costs can result in sluggishness in the housing market despite low interest rates. Going by the Labor Department data, softwood lumber prices rose 52.2% on a year-over-year basis in December, as mentioned in a Reuters article. In fact, going by NAR’s press release, the total housing inventory declined 16.4% month over month in December and came in at 1.07 million units. It also decreased 23% on a year-over-year basis. Also, low employment levels and aggravating coronavirus outbreak may impede momentum of the U.S. housing market.

Homebuilder ETFs Shining Bright

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

iShares U.S. Home Construction ETF (ITB - Free Report)  

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With an AUM of $2.25 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: Buy the Dip in These ETFs).

SPDR S&P Homebuilders ETF (XHB - Free Report)

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 an AUM of $1.46 billion. The fund charges 35 bps in annual fees (read: Ride the Housing Market Momentum With These ETFs).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.26% share. It has amassed assets worth $198.8 million. The expense ratio is 0.59% (read: 4 Sector ETFs & Stocks Top Despite Soft December Jobs Data).

Hoya Capital Housing ETF (HOMZ - Free Report)

The fund seeks to provide investment results that before fees and expenses, correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the US Housing Industry. It has an AUM of $44.8 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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