Will Caterpillar Earnings Inspire Homebuilder ETFs?

Equipment manufacturer Caterpillar reported better-than-expected first-quarter earnings on Wednesday, which could inspire homebuilder exchange-traded funds (ETFs) in what’s been a challenging environment for housing the past year.

The Federal Reserve was unflinching in its rate-hiking policy in 2018 with four straight increases in the federal funds rate. This, in turn, increased lending costs for prospective homebuyers who were already facing the pangs of rising prices.

However, is Caterpillar’s strong first-quarter earnings a sign that the housing market comeback may be in its early stages?

North America and Canada–Caterpillar’s strongest markets–saw sales increase by 7 percent. Construction sales, in particular, rose 3 percent.

“That reflects the strong construction activity, as state and local infrastructure builds are still going up,” said Andrew Bonfield, Caterpillar’s financial chief, in an interview. “North America seems to be going very well.”

Caterpillar’s earning results:

  • Earnings: $2.94 per share vs. $2.85 per share, forecast in a survey of analysts by Refinitiv
  • Revenue: $13.47 billion vs. $13.40 billion, forecast by Refinitiv

ETFs to watch moving forward include the the iShares US Home Construction ETF (BATS: ITB) and SPDR S&P Homebuilders ETF (NYSEArca: XHB). 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.

“Builders report solid demand for new single-family homes, but they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots,” said NAHB Chairman Greg Ugalde, a homebuilder and developer from Torrington, Connecticut.

Lower mortgage rates could 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.

Last month, the central bank decided to keep interest rates unchanged. In move that was widely anticipated by most market experts, the Federal Reserve elected to keep rates unchanged, holding its policy rate in a range between 2.25 percent and 2.5 percent. In addition, the central bank alluded to no more rate hikes for the rest of 2019 after initially forecasting two.

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.

“Ongoing job growth, favorable demographics and a low-interest rate environment will help to modestly spark sales growth in the near term,” said NAHB chief economist Robert Dietz. “However, supply-side headwinds that are putting upward pressure on housing costs will limit more robust growth in the housing market.”

For more market trends, visit ETF Trends.