Last year, rising interest rates and low affordability put a thorn in the side of homebuilders and the real estate sector in general. However, the earth is shifting underneath the real estate sector and a move into a buyer’s market could boost homebuilder exchange-traded funds (ETFs).
At the most recent Federal Reserve meeting, a 25-basis point rate cut was installed, but more cuts could be ahead. This is lowering mortgage rates and enticing prospective buyers to reconsider a real estate purchase.
However, there is a caveat—lower rates portend to a gloomier economic outlook in today’s market.
“Unfortunately, much of the lower interest rate environment can be attributed to global economic uncertainties, which appear to have dampened consumer sentiment regarding the direction of the economy,” said Doug Duncan, chief economist at Fannie Mae. “We do expect housing market activity to remain relatively stable, and the favorable rate environment should continue supporting increased refinance activity.”
However, in addition to falling interest rates, prices are also on the decline, which is putting home ownership back within reach of those who were previously priced out of the market.
“I definitely think it has softened a bit,” said Kelley McMahon a Dallas-area agent with Compass. “It’s not a seller’s market right now. Now is not the time for sellers to put out these crazy prices. Appraisals have gotten a lot harder, and buyers are a little more cautious. They’re more willing to take their time.”
“I think people are a little more cautious to pull the trigger, and I definitely think that people want to get through the election year, just kind of see what happens,” she added.
As such, homebuilder ETFs could be on the verge of a breakout. As such, ETFs to watch moving forward include the the iShares US Home Construction ETF (BATS: ITB) and SPDR S&P Homebuilders ETF (NYSEArca: XHB).
ITB seeks to track the investment results of the Dow Jones U.S. Select Home Construction Index composed of U.S. equities in the home construction sector. The underlying index measures the performance of the home construction sector of the U.S. equity market. The fund may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents.
XHB seeks to provide investment results that correspond generally to the total return performance of an index derived from the homebuilding segment of a U.S. total market composite index. The index represents the homebuilders segment of the S&P Total Market Index (“S&P TMI”).
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