Home Construction ETFs Strengthen on Surging Homebuilder Sentiment

Home construction stocks and sector-related exchange traded funds bucked the trend on Thursday, gaining momentum as homebuilder sentiment returned to pre-coronavirus pandemic levels.

On Thursday, the iShares U.S. Home Construction ETF (NYSEArca: ITB) increased 1.5%, SPDR S&P Homebuilders ETF (NYSEArca: XHB) advanced 1.1%, and Invesco Dynamic Building & Construction ETF (NYSEArca: PKB) rose 0.8%.

According to the National Association of Home Builders/Wells Fargo Housing Market Index, Homebuilder sentiment surged 14 points to 72 in July, compared to expectations of a 62 reading, CNBC reports. Anything above 50 reflects positive sentiment.

“Builders are seeing strong traffic and lots of interest in new construction as existing home inventory remains lean,” NAHB Chairman Chuck Fowke told CNBC. “Moreover, builders in the Northeast and the Midwest are benefiting from demand that was sidelined during lockdowns in the spring. Low interest rates are also fueling demand, and we expect housing to lead an overall economic recovery.”

Mortgage rates have been dipping to record lows almost weekly and will likely remain depressed in the foreseeable future. Consequently, buyers have become more willing to take on mortgage loans to purchase new homes. Mortgage applications to purchase a new home jumped 50% in June year-over-year.

The recovery in home demand has caught many by surprise. Most builders have shut down or severely cut back on operations over March and April and are now struggling to keep up. Many stopped buying land and laid off their labor force while material makers did the same, which has caused a spike in lumber prices.

“Lumber prices are at a two-year high, and builders are reporting rising costs for other building materials while lot and skilled labor availability issues persist,” Robert Dietz, NAHB’s chief economist, told CNBC. “Nonetheless, the important story of the changing geography of housing demand is benefiting new construction. New home demand is improving in lower density markets, including small metro areas, rural markets, and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”

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