Homebuilder ETFs Attract Attention As Market Heats Up | ETF Trends

The homebuilding sector of the market has continued its hot streak as a deluge of potential buyers poured into model homes across the nation, further stoking builder sentiment and boosting interest in homebuilder ETFs. However, and the increase in lumber prices could slow the market’s momentum this fall according to experts.

Builder confidence in the newly built, single-family home market advanced 8% to 78 in August on the National Association of Home Builders/Wells Fargo Housing Market Index, where a reading above 50 is considered positive sentiment.

In its continued climb over the year, the index has now reached a zenith in the 35-year history of the monthly series and is tied with the record set in December 1998. Builder sentiment tanked to 30 in April, when the coronavirus pandemic torched the U.S. economy. Yet it quickly recovered as consumers found themselves in a war for a short supply of existing homes, as they sought more space and made a shift to suburban areas.

“The demand for new single-family homes continues to be strong, as low interest rates and a focus on the importance of housing has stoked buyer traffic to all-time highs as measured on the HMI,” said NAHB Chairman Chuck Fowke. “However, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”

A spike in lumber prices are the result of heightened demand and a shuttering of mills in April and May. Mills not anticipate such robust demand and have faced problems with transportation and labor.

Of the index’s three components, current sales conditions climbed 6 points to 84. Sales projections in the next six months increased 3 points to 78, and buyer traffic gained 8 points to 65, its highest level in the history of the survey.

Continued low mortgage rates and a dearth of existing homes for sale has been a boon to homebuilders. There were too few homes to meet demand even before the pandemic struck, and now even more homeowners are staying put as the coronavirus crisis remains unresolved.

“Housing has clearly been a bright spot during the pandemic and the sharp rebound in builder confidence over the summer has led NAHB to upgrade its forecast for single-family starts, which are now projected to show only a slight decline for 2020,” said NAHB chief economist Robert Dietz. “Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs, and rural markets as renters and buyers seek out more affordable lower density markets.”

For investors looking to use ETFs to invest in the homebuilding space, ETF Trends CEO Tom Lydon discussed the benefits of the SPDR® S&P Homebuilders ETF (XHB) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

Other ETFs to consider are the iShares U.S. Home Construction ETF (NYSEArca: ITB) and the Invesco Dynamic Building & Construction ETF (NYSEArca: PKB).

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