Homebuilder ETFs May Get Unexpected Boost

The housing market and sector-related exchange traded funds have steadily strengthened on moderate home sales and could continue to improve as a gradual rate hike schedule prompts more new home applicants.

Year-to-date, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) gained 0.7% and the iShares U.S. Home Construction ETF (NYSEArca: ITB) increased 5.3%. While the funds include a major allocation toward homebuilders, the underling portfolios also include large tilts toward building products, home retail and furnishing companies.

New home sales rose by 4.3% to a seasonally adjusted annual rate of 490,000 in November, or slightly below expectations of 504,000, reports Ben Leubsdorf for the Wall Street Journal.

“On balance, we view the data as consistent with our outlook for ongoing moderate gains in housing activity,” Barclays economist Jesse Hurwitz said in a note.

Nevertheless, new home sales were 9.1% year-over-year, and sales increased 14.5% in the 11 months of 2015 compared to the same period year-over-year. Home sales, though, have been trending lower since the start of the year.

“The new-home sales series has been choppy lately, but it looks like the trend has been softening since the peak of the expansion reported for February,” J.P. Morgan Chase economist Daniel Silver said in a note. “Some other sales-related measures have also been soft lately, but we still think that the housing market will continue to recover over time.”

Looking ahead, with the Federal Reserve starting to normalize interest rates, albeit at a gradual pace, more Americans may take the signal as a sign to look for cheap financing while they still can. For instance, according to the Mortgage Bankers Association, mortgage applications increased 7.3% last week from the prior week, refinance applications rose 11% and purchase applications was 4% higher, reports Stephanie Dhue for CNBC.