A spate of recently bullish data is boosting homebuilders equities an exchange traded funds, such as the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB) even as a possible interest rate hike from the Federal Reserve looms next month.
The current low inventories has helped bolster property prices. The persistent low-rate environment has helped keep mortgage rates depressed and attract new home buyers. However, wage growth will be required to maintain a rising demand.
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Contributing the rise in home prices, low housing inventories have limited the overall market. The inventories of new homes tightened in April. Given the current sales pace, it could take 4.7 months to exhaust the supply of newly built homes, compared to a projected 5.5 months for the prior month.
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[related_stories]Further fueling the rally in homebuilders, the Toll Brothers (NYSE: TOL) revealed quarterly revenue surged 31% on luxury home sales, beating analysts’ estimates, Reuters reports.
“Given that the new home sales acted as a powerhouse in driving the U.S. housing market, traders are also recommending companies that focus on that section of the market. While Stacey Gilbert, head of derivative strategy at Susquehanna Financial, is surprised at the lack of options activity among housing stocks, she believes there are opportunities in new-homes-focused companies,” reports CNBC.
XHB, ITB and their components rallied after the Commerce Depart revealed purchases of new, single-family homes increased 16.6% in April month-over-month, the fastest pace since January 2008, reports Jeffrey Sparshott for the Wall Street Journal. The median price of a new home also rose to $321,100 in April, up 9.7% year-over-year, and was the highest level on record.
Even if the Fed proceeds with an interest rate hike, the damage to homebuilders stocks and ETFs could be limited.
In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home.
On the other hand, housing industry experts also argue that higher rates reflect an improving economy and wage growth, which could also help the housing market in the long run.
Still, some market observers are worried that the rising mortgage rates could dissuade borrowers to move into new homes.
SPDR S&P Homebuilders ETF
