Housing ETFs Shine on Cooling Inflation
The U.S. Consumer Price Index (CPI) dipped 0.1% sequentially in June and increased just 3.0% year over year. The annual gain marked the slowest rise in consumer prices since early 2021. U.S. inflation, in fact, cooled for the third straight month. This triggered talks that the Fed may cut rates sooner than expected.
In any case, Wall Street got charged up this week as Fed Chair Jerome Powell indicated that the favorable economic conditions may help the Fed to start enacting interest-rate cuts. Thursday's inflation print cemented bets on a cut by September, with around 90% of traders expecting such an outcome, according to the CME FedWatch tool.
Favorable Time for Housing ETFs?
As chances of rate cuts strengthened, investors started to bet big on rate-sensitive sectors like homebuilding. Investors should note that this sector is rate-sensitive and performs better in a falling-rate environment.
Mortgage rates in the United States fell for the fifth time in six weeks. The average for a 30-year, fixed loan was 6.89%, down from 6.95% last week, Freddie Mac said in a statement Thursday, per Bloomberg. The softening of mortgage rates is a big boon to homebuilding stocks and ETFs, as it can revive home sales. Homebuilding ETFs including SPDR S&P Homebuilders ETF XHB and iShares US Home Construction ETF ITB added 5.9% and 6.2% on Jul 11, 2024.
Investors should note that the spring selling season is considered the peak time for home sellers. Per experts, about 40% of home sales take place between April and July in the United States. However, this year, ETF XHB (up 12.9%) and ETF ITB (up 6%) have underperformed the S&P 500 (up 17.8%). Higher mortgage rates and home prices have so far weighed on home sales.
Compelling Valuation
The homebuilding industry trades at a forward P/E of 8.05X versus 18.38X P/E possessed by the S&P 500 ETF IVV. The price-to-book ratio of the industry is also favorable at 1.33 versus 3.92 held by IVV. Price-to-sales ratio of the industry is also favorable at 0.93 compared to IVV's ratio of 2.76.
Sound Financial Prospects
The projected EPS growth of the sector is 6.61% in line with IVV, while historical EPS growth was 33.61% versus 9.98% growth of IVV. The homebuilding industry’s historical sales growth (12.29%) was also higher than IVV (8.35%).
The industry's return on asset is 10.98 times compared to IVV's return on asset of 6.86 times. Homebuilders’ return on investment is 14.66 times compared to IVV's return on investment of 10.98 times.
Upbeat Sector Rank
Homebuilders hail from an upbeat Zacks Construction sector, which ranks in the top 44% out of approximately 16 sectors. The space is up 4.5% in the year-to-date frame and 22.3% in the past one-year timeframe.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports