Earlier this week, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest homebuilders exchange traded funds, got a lift from some buoyant housing data.
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.
SEE MORE: Homebuilder ETFs Jump on Improving Outlook
Some traders see the data as supportive of more gains for ITB, XHB and the ETFs’ holdings. 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.
“XHB isn’t just made of homebuilders like Toll Brothers and Caterpillar, but also many consumer discretionary stocks. The consumer discretionary sector is one of the strongest in the S&P 500 this year, allowing the XHB to ride to the upside as consumer stocks like Home Depot and Williams-Sonoma continue their climb,” according to CNBC.
[related_stories]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.
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.
SEE MORE: Hone in on Homebuilders ETFs
According to CNBC: “Second, the XHB is also strong from a valuation standpoint. “Valuation is 16 times forward earnings versus 18 for the S&P 500, and we’re looking at an average earnings growth of 26 percent,” said Erin Gibbs, chief investment officer at S&P Global. With Gibbs pointing out that the S&P 500’s earnings per share growth is at 5 percent, this implies that investors could get higher growth for cheaper.
For more information on the housing market, visit our homebuilders category.
SPDR S&P Homebuilders ETF
