Low Mortgage Rates Could Shore Up Homebuilder ETFs

National home prices are beginning to taper off, but low mortgage rates could give the housing sector a boost, which could shore up homebuilder exchange-traded funds (ETFs). Home prices were higher in June by 3.1% annually, according to the S&P CoreLogic Case-Shiller national home price index.

June’s number fell from the 3.3% annual gain experienced in May. In addition, The 10-City Composite annual increase came in at 1.8%, down from 2.2% in May, and t he 20-City Composite rose 2.1% annually, which was down from 2.4% in the previous month.

“Home price gains continue to trend down, but may be leveling off to a sustainable level,” said Philip Murphy, managing director and global head of Index Governance at S&P Dow Jones Indices in a release. “Fewer cities (12) experienced lower YOY price gains than in May (13).

Homebuilder exchange-traded funds (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).

Speaking of ITB, the fund is up 7 percent within the past month, which constitutes its highest level since April 2018. While the S&P 500 has succumbed to the trade war and yield curve inversion volatility, homebuilder stocks have been heading towards the upside with possibly more to come.

From a technical perspective, things are also looking on the up and up.

There is “a really nice technical pattern here, sort of an inverse head and shoulders. … We’re through just at about $48. It’s a pretty good jumping off point to see if we can get those highs,” said Tradinganalysis.com founder Todd Gordon.

Lower bond yields have helped keep interest rates low–a good sign for homebuilders as prospective home buyers pay less for financing.

Leveraged plays on home builder stocks include the bullish Direxion Daily Homebuilders and Supplies Bull and Bear 3X Shares (NYSEArca: NAIL), which attempts to deliver triple the daily returns of the Dow Jones U.S. Select Home Construction Index.

Lower mortgage rates could continue to give the housing market a much needed boost, which could translate to more strength for homebuilders. Rising rates, low affordability and rising homebuilder costs due to tariffs have been thorns in the side for the housing market.

This year, the central bank has been keen to keep interest rates unchanged. In addition, the central bank alluded to possible rate cuts for the rest of 2019.

Once again, however, the rising costs of supplies could keep home prices rising, but that could be tempered if the current labor market remains robust.

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