While rising rates have weighed on Americans’ demand for new homes, homebuilder sector-related exchange traded funds can still find support from deep-pocketed investors who are targeting the rental market.
Year-to-date, the iShares U.S. Home Construction ETF (NYSEArca: ITB) has decreased 30.9% and the SPDR S&P Homebuilders ETF (NYSEArca: XHB) has declined 28.2%.
The majority of new homes built in 2021 were sold to individuals and families to live in, but rising mortgage rates off the back of a hawkish Federal Reserve policy outlook are making traditional buyers take a step back.
However, investors with billions of dollars in investment money are willing to step in to fill the void left by traditional buyers, supporting homebuilders with a quick turnaround in inventories and fueling the sector’s recent construction boom, the Wall Street Journal reports.
According to John Burns Real Estate Consulting LLC and the National Rental Home Council, over one in every four houses purchased by professional rental investors in the fourth quarter of 2021 was a newly constructed house. In comparison, new homes made up just 3% of what these investors acquired during the third quarter in 2019.
Big investors may continue to support the homebuilder industry with bulk purchases in the days ahead. According to real estate research and advisory firm Zelman & Associates, large investors are sitting on some $89 billion in capital, which could be spent on building or buying new rental homes, and they have only deployed about one-quarter of their cash hoard.
Homebuilders are also very keen on selling to large investors, since multiple transactions can be done in cash to turn a profit more quickly.
Consequently, there has not been a dip in new home construction even as mortgages are rising. As of February, there were 799,000 single-family homes under construction in the U.S., an increase of 28% year-over-year, according to government data.
“Those potential buyers still want more space,” Robert Dietz, chief economist at the National Association of Home Builders, a builder trade group, told the WSJ. “And so single-family rental is likely to continue to show some strength.”
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