The US housing data released last week encouraged investors as and surpassed all expectations.
Despite economic uncertainties during the new coronavirus pandemic, housing statistics released jointly by the US Census Bureau and the US Department of Housing and Urban Development on August 18 showed the health and resilience of the housing sector. These numbers bolstered optimism for recovery and by Friday, not only did housing sector stocks hit new highs, they also closed the week with a new record close.
Below we look at catalysts for the positive momentum, potential headwinds and two exchange-traded funds (ETFs) that should be on your radar.
Housing Stock Up
2019 was a strong year for the US housing market as the Fed reversed its 2018 stance and cut back. The result: Low mortgage rates made buying homes more affordable for millions. Analysts expect the housing market to reflect the annual growth of the economy and in all likelihood 2020 also started the year at a strong pace
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But when the impact of COVID-19 was initially felt in the US, shares of housing companies – like most other sectors – collapsed in March. Since the initial shock of the pandemic passed and measures have been taken to control the risks to some extent, the housing industry has seen an incredible turnaround with businesses hitting a record high of 52 weeks or even record pace.
What is behind this surge in home sector stock prices? Recent data shows that Americans are re-entering the housing market en masse, likely due to a combination of factors.
The public is spending more time at home in response to the coronavirus and many companies have switched to remote working. At the same time, the Fed further cut interest rates to record lows, encouraging more people to buy homes. All of this has fueled household interest in larger properties in the suburbs away from cities where housing costs are usually high. New-build homes in particular see a peak in demand.
Still, COVID-19 continues to pose significant risks to the economy. So it is not possible to know how long the uptrend in the housing market will last. However, it is possible that we are in a multi-year boom in the industry.
Those investors who believe that the power of housing is likely to continue in the long run can do further due diligence on the following two ETFs:
1. iShares U.S. Home Construction ETF
Current price: $ 56.59
52 Week Range: $ 22.39 – $ 56.69
Current Dividend Yield (TTM-Trailing Twelve Month): 0.46%
Expense Ratio: 0.42% per year, or $ 42 with an investment of $ 10,000
The iShares US Home Construction ETF (NYSE 🙂 provides exposure to US residential and home construction companies.
ITB, which tracks the Jones index, currently has 44 positions. The top three are DR Horton (NYSE 🙂 Lennar (NYSE 🙂 and NVR (NYSE 🙂 . The shares of these three companies comprise approximately 37% of the net assets, which amount to approximately $ 2.2 billion.
The most important sectors by weighting include residential construction (66.12%), construction products (14.17%), and home improvement retail (9.77%).
Year-to-date the ITB is up more than 27%. It even hit a record high of $ 56.69 on August 21. The lagging P / E and P / B are at 17.51 ??and 2.45 respectively.
A protracted second wave of the pandemic in the coming months may take some of the buzz from the housing activity that has recently undergone a major turnaround. Profit could also potentially be taken in ITB in the short term, which would provide better value if the price were to fall towards the USD 52.5 level.
2. The SPDR S&P Homebuilders ETF
Current Price: $ 53.71
52 Week Range: $ 23.95 – $ 53.95
Current Dividend Yield (TTM-Trailing Twelve Month): 0.81%
Expense Ratio: 0.35% per year, or $ 35 with an investment of $ 10,000
The SPDR S&P Homebuilders ETF (NYSE 🙂 which has 35 companies tracks the index. Assets under management amount to $ 1.2 billion.
The fund's sub-sector allocation focuses on Building Products (38.78%), Homebuilding (31.75%) and Home Improvement Retail (11.40%).
XHB offers exposure to large, mid and small cap stocks, each with a weight between 4% -5%. The three main companies in the fund are Whirlpool (NYSE 🙂 DR Horton and PulteGroup (NYSE :).
So far in the year, XHB is up more than 18%. Like ITB, XHB also saw its all-time high on August 21, hitting the $ 53.71 level. The lagging P / E and P / B are at 18.40 and 2.81 respectively. Long-term investors may want to consider buying the fund, especially if XHB comes under pressure in the short term and falls below $ 50, and especially towards $ 47.5
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