ETF Trends
ETF Trends

Homebuilder stocks and sector-related exchange traded funds climbed Tuesday after new U.S. home sales unexpectedly rose to their highest level since 2007 on rising demand and shrinking inventories.

On Tuesday, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) rose 2.0% and iShares U.S. Home Construction ETF (NYSEArca: ITB) gained 2.7%. Year-to-date, XHB increased 5.4% and ITB advanced 6.3%.

A surprise July new home sales data helped reinforce homebuilder stocks. According to the Commerce Department, sales increased 12.4% to a 654,000 annualized pace in July, its fastest in almost nine years, and well above estimates of about 540,000 to 610,000, reports Michelle Jamrisko for Bloomberg.

“We see tremendous growth potential in new-home sales as housing demand continues to grow and the continued supply shortage of newer vintage homes,” Tian Liu, chief economist at Genworth Mortgage Insurance, told the Associated Press.

SEE MORE: Homebuilder ETFs Jump on Improving Outlook

The number of homes sold but not yet started rose to the highest level since May 2007, suggesting that construction will continue to contribute to growth.

Supporting the rising demand for new home purchases, the improved employment numbers and historically low borrowing costs are helping more Americans acquire their single-family home. The U.S. unemployment rate remained at 4.9% in July, according to the Labor Department. The average rate on 30-year, fixed mortgage was 3.43% for the week ended August 18, compared to the record-low of 3.31% in 2012.

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The Commerce Department data revealed an jump in the share of homes sold for less than $300,000, which suggests that builders may be looking to target starter-home buyers.

The increase “makes perfect sense when interest rates are low, credit continues to ease, and the consumer is in decent shape given the jobs market,” Brett Ryan, U.S. economist at Deutsche Bank Securities Inc., told Bloomberg. “You’re seeing finally that builders are responding with more supply, and that’s been one of the big problems in the current cycle.”

SEE MORE: Hone in on Homebuilders ETFs

Furthermore, sales have risen 3.5% at building materials stores and 4.3% at furnishing stores.

ITB and XHB both include exposure to home products and retailers, along with their large homebuilders allocations. Specifically, ITB holds 63.8% homebuilding, 15.6% building products, 9.0% home improvement retail, 4.3% home furnishing, 2.5% trading companies & distributors, 2.2% specialty chemicals, 1.3% construction materials and 1.2% forest products. XHB has 33.4% building products, 29.4% homebuilding, 13.2% home furnishing, 9.8% home furnishing retail, 8.6% home improvement retail, 5.6% household appliances.

For more information on the housing market, visit our homebuilders category.

iShares U.S. Home Construction ETF