The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB) have been surging to start 2017 and data suggest there are solid fundamentals backing the moves for these homebuilder ETFs.
The equal-weight XHB mixes stocks such as Tempur Sealy (NYSE: TPX), Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH) with pure play homebuilders such as Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOLL) among others. That ETF is higher by about 8.7%.
With ITB being a more pure play on homebuilders equities, that ETF is really soaring with a year-to-date gain of almost 15%.
“A monthly index of builder sentiment jumped six points to the highest level in 12 years. The National Association of Home Builders/Wells Fargo Housing Market index hit 71 in March, a sizable jump from 58 in March of 2016. Anything above 50 is considered positive sentiment,” reports CNBC.
Some investors believe President Trump will follow through on campaign promises to reduce corporate taxes, cut back on regulations and throw billions of dollars into the U.S. economy. However, the expansionary rhetoric has caused the Federal Reserve to tighten its monetary policy, which could push up mortgage rates. Since Election Day, ITB and XHB have been among the hottest “Trump trades.”
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.
Conversely, 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.
Another ETF idea to consider is the PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB), but that ETF takes a larger focus on consumer discretionary and materials companies.
“Builders are not only pleased with Trump’s first move on water, they also expect further deregulation to bring down construction costs. There are, however, other roadblocks keeping the nation’s builders from producing more homes, which are sorely needed in today’s tight housing market,” according to CNBC.
For more information on the housing sector, visit our homebuilders category.