While the frenetic housing market is showing signs of cooling down, homebuilder sector-related exchange traded funds may return to reflect a more normal path of growth, following a period of consolidation.
Year-to-date, the iShares U.S. Home Construction ETF (ITB) decreased 25.0%, SPDR S&P Homebuilders ETF (XHB) declined 22.0%, Invesco Dynamic Building & Construction ETF (PKB) fell 19.4% and Hoya Capital Housing ETF (HOMZ) was down 16.5%.
As mortgage rates continue to push higher from a period of record low levels, the housing market is exhibiting signs of cooling with construction starts, existing home sales, and mortgage application data all slowing, Bloomberg reports.
Nevertheless, since the beginning of the third quarter, the S&P Supercomposite Homebuilders Index outperformed the broader market, advancing almost 17%, compared to the 13% gain for the S&P 500.
“I actually don’t think there’s anything quite wrong at this point,” Tom Shapiro, president of GTIS Partners, told Bloomberg.
The recent slowdown in the housing market could reflect a return to normalcy, after “incredibly high housing numbers” for the past two years, Shapiro added.
According to the latest government data update, construction starts declined over July to their slowest rate since early 2021, and residential starts even fell almost 10% to a 1.45 million annualized rate.
However, market observers argued that the past year has been abnormally strong, so we can’t use that as a benchmark for future progress in the housing market.
“If you look at the housing data we saw in starts, the month we just produced was the average of 2020 including the pandemic – it would have been the best month of any month from 2009 to 2019,” Cole Smead, president of Smead Capital Management, told Bloomberg. “Return on equity is going to stay higher even with a pullback.”
Investors remain optimistic and don’t believe the housing market will deteriorate into another 2008 financial downturn.
“I just don’t see this being anywhere near a GFC situation,” Shapiro said. “We just don’t have the supply we had.”
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