Coronavirus Could Crimp Homebuilder Margins | ETF Trends

Homebuilder stocks and ETFs were market darlings last year, but even with declining mortgage rates, the group is struggling.

The marquee homebuilder ETFs are the SPDR S&P Homebuilders ETF (NYSEArca: XHB), iShares U.S. Home Construction ETF (NYSEArca: ITB) and the Invesco Dynamic Building & Construction ETF (NYSEArca: PKB).

Some analysts are saying the coronavirus outbreak could take a bite out of the previously sturdy sector, potentially weighing on results.

“Widespread lockdowns across major markets and consumer fears around coronavirus during the critical spring selling season will negatively affect US homebuilder profitability, particularly those with high spec inventory,” says Fitch Ratings. “The situation is very fluid and evolving and while the overall impact is hard to determine at this time, homebuyer traffic, and consequently orders, are expected to be weak, at least in the short to medium term. Should a prolonged lockdown and economic slowdown result in meaningfully weaker housing activity, the better-capitalized homebuilders should have the capacity to withstand the downturn, so long as they stick to their operating and financial strategies.”

Honing on Homebuilders

XHB seeks to provide investment results that correspond generally to the total return performance of an index derived from the homebuilding segment of a U.S. total market composite index, and in order to track the performance of the S&P Homebuilders Select Industry Index, the fund employs a sampling strategy.

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.

How the consumer endures the coronavirus situation will prove pivotal in determining the fortunes of homebuilder stocks and ETFs over the rest of 2020.

“In addition to lower consumer confidence, a more widespread and prolonged lockdown in the US to slow the spread of coronavirus, proactive self-quarantine measures by consumers, and reluctance by potential sellers to show their homes could also dampen the spring selling season,” according to Fitch. “Delays in inspections, which would consequently push out new home closings, are likely if municipalities slow or close some services to curb the spread of coronavirus. Disruptions in the supply of building products and materials could also delay home closings.”

XHB is looking attractive on valuation with a price-to-earnings ratio of 8x and a price-to-book ratio of 1.25x, according to issuer data.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.