ETFs to Gain on Upbeat US Housing Starts in December

Sweta Jaiswal, FRM
·5-min read

The release of encouraging data from the U.S. housing market highlights the sector’s strength 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.

Building permits, a construction pointer for the coming months, increased 4.5% to a rate of 1.709 million units in the same month. For 2020, permits stood at 1.452 million, rising 4.8% from 2019.

There was a 12% surge in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.338 million units in December. Moreover, permits to construct single-family homes climbed 7.8% to 1.226 million units in the period, per the sources.

Meanwhile, housing starts for the multi-family housing segment plunged 13.6% to 331,000 units last month. Moreover, there was a 3% decline in permits to a rate of 483,000 units in December for building multi-family homes.

Notably, single-family starts rose for the eighth consecutive month. It is being observed that the upside can be largely attributed to the pandemic, as at least 23.7% of the labor force is working from home, per a Reuters article. This resulted in people shifting from city centers to suburbs and other low-density areas as they are looking for spacious accommodations for home offices as well as schools.

The U.S. housing sector pleased investors with impressive performance amid the tough pandemic times. However, the 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.

The U.S. housing market has been consistently battling with limited inventory, largely due to land shortages and skilled labor deficiencies along with escalating material costs. All these factors are affecting affordability as prices of both existing and new homes are soaring. 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.

Meanwhile, low interest rates are boosting demand in the housing market, resulting in an increase in mortgage applications. Also, the introduction of another round of fiscal stimulus is expected to strengthen the U.S. housing market.

Homebuilder ETFs That May Keep Gaining

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  

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: 4 Sector ETFs & Stocks to Bet on Q4 Earnings).

SPDR S&P Homebuilders ETF XHB

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  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.05% share. It 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

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).

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.  Get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report