The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two benchmark homebuilders exchange traded funds, are notching some impressive 2017 performances.
For example, XHB is up a solid 30% while ITB is up a staggering 56% this year. The PHLX Housing Sector Index (HGX) has finally found its way back to its 2005 highs, which could prove meaningful for ITB and XHB although neither ETF tracks that index. XHB follows the S&P Homebuilders Select Industry Index while ITB tracks the Dow Jones U.S. Select Home Construction Index.
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.
However, some analysts and market observers believe there will be only a muted impact on homebuilders from the tax reform effort.
“The decline in tax benefits for homeowners is likely to have no impact on most of the regional housing markets in the US for large public homebuilders but may have a subtly negative impact on prices in the most expensive markets,” Fitch Ratings says. “However, from a credit perspective, the corporate tax provisions are somewhat negative for the homebuilder sector due to the elimination of net operating loss (NOL) carrybacks.”
Federal Reserve policy could also impact ITB and XHB. 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.
“The tax bill’s reduction in benefits for home ownership will be offset by generally higher take home incomes making some markets more affordable and net out to positive for the home buyer,” said Fitch. “Fitch believes affordability is most likely to improve in lower cost, lower tax states, such as Texas. In more expensive markets, the increase in after-tax income for buyers could offset the loss of home ownership benefits. Furthermore, our calculations show that the cost of the tax bill pales in comparison with the impact of likely interest rate increases.”
For more information on the housing sector, visit our homebuilders category.