Decent housing data and lower interest rates are helping homebuilder ETFs, such as the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), rally this year. For example, ITB is higher by nearly 29% year-to-date and plans by the Federal Reserve to further lower borrowing costs could boost the fund.

Homebuilder stocks have rallied as interest rates pulled back this year, reducing the cost to borrow for many would-be homeowners. The 30-year mortgage rate declined to 3.75%, its lowest level in over two years, the Wall Street Journal reports.

The favorable environment for home buyers helped improve homebuilder sentiment and caused some analysts to upgrade companies like Lennar Corp. Furthermore, the industry has benefited from falling lumber prices.

Jefferies analyst Sean Darby “writes that lower rates have improved housing affordability and that recent earnings reports from companies including D.R. Horton (DHI), Lennar (LEN), and PulteGroup (PHM) show that home builders are profiting from this trend, especially as employment and consumer confidence remain strong,” reports Teresa Rivas for Barron’s.

Those stocks are three of ITB’s top four holdings and combine for about 32% of the fund’s weight, according to issuer data.

Help For Homebuilder ETFs

Home improvement companies and homebuilder-related ETFs could find support from homeowners whom are willing to reinvest in their own homes. Additionally, the inverted yield curve doesn’t yet appear to be taking a toll on homebuilder equities.

“There are no signs that this has impacted lending to the residential real estate sector nor sentiment towards the home builders,” said Darby, according to Barron’s.

With its focus on residential real estate, the newly minted  Hoya Capital Housing ETF (HOMZ)  is another real estate ETF to consider against the backdrop of lower interest rates.

Related: A Homebuilder ETF to Track Spending on U.S. Housing 

HOMZ tracks the Hoya Capital Housing 100 Index, a rules-based index composed of the 100 companies that collectively represent the performance of the US Housing Industry. According to Hoya Capital, the ETF is designed to track total spending on housing and housing-related services. The underlying index is composed of four US Housing Industry Business Segments, each weighted based on their relative contribution to US Gross Domestic Product.

HOMZ is up nearly 6% since coming to market in April.

For more information on the housing market, visit our homebuilders category.

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