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.
The Fed raised short-term rates by 25 basis points, but the move barely affected long-term rates – the average contract interest rate on 30-year fixed mortgages only rose 1 basis point to 4.16%, and rates on 15-year fixed-rate mortgages were 7 basis points higher to 3.45%, the highest level since October 2014.
“Borrowers may have been spurred to act by the potential for future rate increases from the Fed, which are more likely to be reflected in higher mortgage rates over time,” Mike Fratantoni, the association’s chief economist, told CNBC.
Moreover, lenders are making it easier for borrowers to qualify. Ellie Mae, a mortgage analytics company, calculated that the average FICO score on all closed loans dipped to 721, the sixth-consecutive monthly decline and 18 points lower year-over-year.
iShares U.S. Home Construction ETF
For more information on the housing sector, visit our homebuilders category.
Max Chen contributed to this article.