Yahoo Finance Pain or Gain Ahead of Homebuilding ETFs?
US homebuilder confidence in the market for newly built single-family homes fell to 43 in June, down two points from May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released on June 19. This marks the lowest reading since December 2023.
“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kansas. The sector is grappling with higher rates for construction and development loans, prolonged labor shortages, and a lack of land.
The Fed has been facing difficulties in achieving its target inflation rate of 2% due to a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate. This has hurt consumers’ buying spree and builder’s confidence.
iShares U.S. Home Construction ETF ITB is up about 2% and SPDR S&P Homebuilders ETF XHB has gained 10.8% this year. Both underperformed iShares Core S&P 500 ETF IVV’s return of 15.7%. Let’s see if these funds can rebound ahead.
Price Cuts and Sales Incentives
The June HMI survey revealed that 29% of builders reduced home prices to boost sales, the highest share since January 2024 (31%) and well above the May rate of 25%. However, the average price reduction in June remained steady at 6% for the 12th successive month. Additionally, the use of sales incentives increased to 61% in June from 59% in May, the highest share since January 2024 (62%).
In June, the Housing Market Index for current sales conditions fell three points to 48, the measure for sales expectations in the next six months dropped four points to 47, and the gauge for traffic of prospective buyers retreated two points to 28.
What Lies Ahead?
The recent inflation and retail sales data has ignited market expectations of interest rate cuts this year, with a likelihood of 57.9% that the Fed might lower the rate to 5%-5.25% in September, according to the CME FedWatch Tool. And there is a probability of 44.2% that the Fed might cut the rate to 4.75%-5.00% in December.
According to Fannie Mae, as quoted on Yahoo Finance, the 30-year mortgage rate is projected to end 2024 at 7% and will continue sliding throughout 2025, ending the year at 6.60%. The Mortgage Bankers Association, according to Yahoo Finance, gave a more optimistic estimate for the mortgage rates, forecasting the rate to end the current year at 6.5%, falling further in 2025 to 5.9%.
Upbeat Industry and Sector Ranks
The Zacks Building Products - Home Builders industry contains many of these stocks and currently ranks in the top 14% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. This group has been subdued this year with just 0.1% gains, but could soar ahead due to the possibility of easing interest rates.
Quantitative research studies suggest about half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. Not only upbeat industry rank, homebuilders hail from an upbeat Zacks Construction sector, which ranks in the top 19% out of approximately 16 sectors.
Compelling Valuation
Homebuilding industry trades at a forward P/E of 8.33X versus 18.50X P/E possessed by the S&P 500 ETF IVV. Price-to-Book ratio of the industry is also favorable at 1.35X versus 3.85X held by IVV. Price-to-Sales ratio of the industry is also favorable at 0.93X, compared to IVV's ratio of 2.73X.
Sound Financial Prospects
Projected EPS Growth of the sector is 6.61% versus 6.64% of IVV while historical EPS growth was 34.53% versus 9.87% growth of IVV. The homebuilding industry’s historical sales growth (12.50%) was also higher than IVV (8.25%).
The industry's return-on-asset is 10.60 times, compared to IVV's return-on-asset of 6.88 times. Homebuilders’ return-on-investment is 14.41 times, compared to IVV's return-on-investment of 10.94 times.
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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
