Though the U.S. housing market saw a rough first quarter, sales are picking up as the spring selling season gets into full swing. The season usually warms up in March and sees maximum business till the back-to-school season in September.
The spring selling season generally brings in improving sales trends. Higher job numbers, a reassuring economy, moderating home price gains, affordable interest/mortgage rates, rising rentals, recent federal initiatives to increase mortgage availability and a limited supply of inventory point to an inevitable pickup in the housing market.
Even though the U.S. economy faltered in the first quarter of the year, this can mostly be attributed to the strong dollar and a harsh winter. The economy is expected to improve later this year. Rising consumer confidence, a reassuring economy and improving employment trends should lead to better home sales as the year progresses.
Last year saw slowing housing price gains on stabilizing demand. The trend is expected to continue in 2015 as well.
Moreover, housing should remain an affordable option in 2015, as mortgage rates are still below historical levels. Even if mortgage rates rise in the latter half of the year - as is widely anticipated - housing will likely remain reasonable. Apartment rental rates have also continued to move up, making home buying more attractive than renting.
To add to the positives, plans from the White House to cut premiums on mortgage insurance should increase mortgage availability and thereby encourage home buying among first-time homebuyers.
With oil prices continuing their downward journey and the economy largely on the mend, the desire to own new homes should get a shot in the arm.
ETFs to Tap the Sector
Given the improving fundamentals, the homebuilding sector deserves a closer look. For investors willing to play the space in a less risky way, an ETF approach can be a good idea.
This technique can help to spread out assets among a wide variety of companies and reduce company-specific risk at a very low cost. Below, we have highlighted three ETFs that are worth looking into.
SPDR Homebuilders ETF (NYSEARCA:XHB)
XHB is one of the more popular homebuilding ETFs in the market today, with assets under management of around $1.58 billion and a trading volume of roughly 4.28 million shares a day. The fund has an expense ratio of 35 basis points.
The fund holds 37 stocks in its basket, with 50% of the assets going to mid caps and 6% comprising large-cap stocks. Despite the smaller holding pattern, the fund does not appear to be concentrated in the top 10 holdings.
The fund has just 33.9% in the top 10, with Aaron's Inc. (NYSE:AAN), A. O. Smith Corporation (NYSE:AOS) and Tempur Sealy International Inc. (NYSE:TPX) occupying the top 3 positions with asset allocation of 3.84%, 3.54% and 3.41%, respectively.
The fund's assets include 32.83% homebuilders, 29.27% building products and 15.59% home furnishing retail stocks. The fund carries a Zacks Rank #3 (Hold), with a high level of risk.
iShares U.S. Home Construction ETF (BATS:ITB)
Another popular choice in the homebuilding sector is ITB, which tracks the Dow Jones U.S. Select Home Construction Index. It has $2.03 billion in assets, with a trading volume of roughly 4.1 million shares a day, while its expense ratio is just 45 basis points.
The fund holds 37 stocks in its basket, of which only 11% are large cap securities. The fund has a concentrated approach in the top 10 holdings, with 57.7% of its asset base invested in them.
Homebuilders accounts for around 65% of this fund. The fund carries a Zacks Rank #3 (Hold), with a high level of risk.
PowerShares Dynamic Building & Construction Portfolio ETF (NYSE:PKB)
This ETF comprises around 30 housing companies, and has its assets invested across all classes of the market spectrum. Engineering and construction stocks comprise 21% of the fund, followed by building materials companies that account for 17%. A look at the style pattern reveals that the fund has a preference for growth stocks.
The fund manages an asset base of $56.4 million, and has an expense ratio of 63 basis points. The fund has only 15% in large cap securities and 46.3% in the top 10 holdings. The fund carries a Zacks Rank #3 (Hold), with a high level of risk.
To Sum Up
While the housing market slowed down in the first quarter, homebuilders are increasingly optimistic of the spring selling season. However, increasing competitive pressure and rising land and construction cost amid moderating home price increases are the headwinds in the housing market.