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The U.S. housing market has been in the pink over the past few months despite the ongoing coronavirus crisis. The favorable operating backdrop and upbeat earnings have been propelling the space. The sales scenario has been robust. Existing homes account for the majority of home sales in the United States.
Though sales momentum cooled down a bit lately due to higher prices, things are still hot in the space. Sales of new U.S. single-family homes increased in July after three successive months of declines. Existing-home sales rose in July, marking increases for two months in a row.
Rising home prices and supply crunch are concerns. “You can see in just basically the last 15 months or so, we’ve seen a dramatic acceleration in home price growth to levels we haven’t seen in decades,” CoreLogic chief economist Frank Nothaft said, as quoted on CNBC. Still the CNBC article says that according to most experts, the market looks more like a boom rather than a bubble.
Why “It's a Boom Not a Bubble”?
“According to the National Association of Realtors, the U.S. has underbuilt its housing needs by at least 5.5 million units over the past 20 years. That’s a stark comparison to the previous housing bubble in 2008 when overbuilding was the issue,” as quoted on the same CNBC article. So, the scenario is pretty different now from 2008’s housing market bubble. Given under-construction and rising raw-material prices in 2021, no wonder, home prices would go up.
Then there are ultra-low mortgage rates. At the start of the pandemic in March 2020, the 30-year fixed-rate mortgage rate sat at 3.45%. By Sep 9 of this year, that number has fallen to 2.88%. That too rates have been on an uptrend lately thanks to the Fed’s taper talks.
According to Alex Pettee, president, director of Research & ETFs, Hoya Capital Real Estate, a potential post-pandemic “suburban revival” would continue to boost home buying. The coronavirus outbreak has made the work-from-home option a big hit. Companies now will likely be offering the option permanently with more ease. So many people are now moving to suburban areas to avoid high expenses involved in a dense and expensive city. Suburban areas offer more affordable homes.
Decent financial position of the homebuilding companies is another plus. Overall, debt-to-equity ratio of the sector stands at 0.33X versus 0.64X for the S&P 500-based ETF IVV. Current ratio of the industry stands at 3.51X versus 1.35X of IVV, meaning the sector is well positioned in meeting short-term liquidity needs. Valuation of the homebuilding sector is even more lucrative as forward P/E ratio of the space is 6.67X versus 20.42X of S&P 500 ETF IVV.
In such a background, here are a few housing ETFs that investors may choose to play depending on market conditions.
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 $2.31 billion, it holds a basket of 46 stocks, heavily focused on the top two firms – D R Horton (13.95%) and Lennar (13.02%). The product charges 41 basis points (bps) in annual fees.
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. Floor & Decor Holdings (4.30%), Builders FirstSource (4.19%) and Carrier Global (4.16%) are the top three spots in the fund. It has an AUM of $1.82billion. The fund charges 35 bps in annual fees.
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 U.S. housing industry.
The fund does not have company-specific concentration risks with no stock accounting for more than 3.06% of the basket. It has an AUM of $81.1 million. The fund charges 30 bps in annual fees.
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Forget Bubble Fear: Bet on Housing ETFs
The U.S. housing market has been in the pink over the past few months despite the ongoing coronavirus crisis. The favorable operating backdrop and upbeat earnings have been propelling the space. The sales scenario has been robust. Existing homes account for the majority of home sales in the United States.
Though sales momentum cooled down a bit lately due to higher prices, things are still hot in the space. Sales of new U.S. single-family homes increased in July after three successive months of declines. Existing-home sales rose in July, marking increases for two months in a row.
Rising home prices and supply crunch are concerns. “You can see in just basically the last 15 months or so, we’ve seen a dramatic acceleration in home price growth to levels we haven’t seen in decades,” CoreLogic chief economist Frank Nothaft said, as quoted on CNBC. Still the CNBC article says that according to most experts, the market looks more like a boom rather than a bubble.
Why “It's a Boom Not a Bubble”?
“According to the National Association of Realtors, the U.S. has underbuilt its housing needs by at least 5.5 million units over the past 20 years. That’s a stark comparison to the previous housing bubble in 2008 when overbuilding was the issue,” as quoted on the same CNBC article. So, the scenario is pretty different now from 2008’s housing market bubble. Given under-construction and rising raw-material prices in 2021, no wonder, home prices would go up.
Then there are ultra-low mortgage rates. At the start of the pandemic in March 2020, the 30-year fixed-rate mortgage rate sat at 3.45%. By Sep 9 of this year, that number has fallen to 2.88%. That too rates have been on an uptrend lately thanks to the Fed’s taper talks.
According to Alex Pettee, president, director of Research & ETFs, Hoya Capital Real Estate, a potential post-pandemic “suburban revival” would continue to boost home buying. The coronavirus outbreak has made the work-from-home option a big hit. Companies now will likely be offering the option permanently with more ease. So many people are now moving to suburban areas to avoid high expenses involved in a dense and expensive city. Suburban areas offer more affordable homes.
Decent financial position of the homebuilding companies is another plus. Overall, debt-to-equity ratio of the sector stands at 0.33X versus 0.64X for the S&P 500-based ETF IVV. Current ratio of the industry stands at 3.51X versus 1.35X of IVV, meaning the sector is well positioned in meeting short-term liquidity needs. Valuation of the homebuilding sector is even more lucrative as forward P/E ratio of the space is 6.67X versus 20.42X of S&P 500 ETF IVV.
In such a background, here are a few housing ETFs that investors may choose to play depending on market conditions.
ETFs in Focus
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 AUM of $2.31 billion, it holds a basket of 46 stocks, heavily focused on the top two firms – D R Horton (13.95%) and Lennar (13.02%). The product charges 41 basis points (bps) in annual fees.
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. Floor & Decor Holdings (4.30%), Builders FirstSource (4.19%) and Carrier Global (4.16%) are the top three spots in the fund. It has an AUM of $1.82billion. The fund charges 35 bps in annual fees.
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 U.S. housing industry.
The fund does not have company-specific concentration risks with no stock accounting for more than 3.06% of the basket. It has an AUM of $81.1 million. The fund charges 30 bps in annual fees.