Sales of both newly built and previously owned homes hit record levels in June, while pending home sales also edged higher. These are signs of sturdy demand in the housing market, which was made possible by low mortgage interest rates and solid growth in employment.
Encouraging housing starts and permit numbers have also put to rest the niggling concerns about supply constraints. This calls for investing in fundamentally sound real estate mutual funds.
New Home Sales Climb to 8-Year High
Sales of newly built single-family homes jumped 3.5% in June to a seasonally adjusted annual rate of 592,000, the highest level since Feb 2008, according to the Commerce Department. May's sales were also revised upward to a 572,000 annual rate from an earlier estimate of 551,000.
Purchases of new single-family homes soared 10.1% during the first six months of the year compared with the same period last year, according to the Commerce Department. Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said that the "fact that new home sales reached their highest pace in over eight years shows the housing market is gaining momentum."
Home Resales Hit 9-Year High, Pending Sales Edge Up
According to the National Association of Realtors (NAR), sales of existing homes rose 1.1% in June from May to a seasonally adjusted rate of 5.57 million, its highest level since Feb 2007. Shares of first time buyers touched 33% in June, the highest level since July 2012.
A measure of homes under contract for sale rose slightly in June. Pending home sales increased 0.2% in June compared to May and was 1% higher than the same period last year, according to NAR. This puts pending home sales at the second highest level in the last 12 months. Sales outperformed expectations and the reasons can well be traced to lower mortgage rates and a strong jobs report.
Affordable Home Financing, Upbeat Jobs Data
Bond prices increased in June as Brexit woes pushed investors to seek safe-haven assets. Higher bond prices led to lower yields. This came as good news for home borrowers as mortgage rates also dipped, as they tend to follow the trajectory of the yield on the 10-Year Treasury bond. According to Freddie Mac, the 30-year fixed-rate mortgage was 3.57% in June, down from 3.98% in June 2015.
Improvement in jobs numbers and wages also boosted the housing market. Per the Bureau of Labor Statistics, the U.S. economy created a total of 287,000 jobs in June, significantly higher than the consensus estimate of 177,000. Average hourly earnings also gained 0.1% or 2 cents in June from May to $25.61 per hour.
Supply Side Issues Addressed: Buy 4 Real Estate Mutual Funds
Thanks to strong sales figures, it is evident that the housing market is on a solid growth curve in spite of the much talked about supply constraints. Moreover, it runs against analysts' predictions that the pace of home sales would moderate this year.
Concerns about supply constraints have subsided due to an increase in both housing starts and building permits in June. U.S. housing starts rose 4.8% to a seasonally adjusted rate of 1.189 million in June from the previous month, according to the Commerce Department. Building permits, a bellwether for upcoming construction, also rose 1.5% to 1.153 million in June. Moreover, housing inventory was almost 6% lower at the end of June compared to a year ago.
Given these promising trends, investing in real estate mutual funds will be a prudent decision. We have chosen four such mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5,000 and carry low expense ratios.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear.
The Voya Real Estate Fund Class A (MUTF:CLARX) invests a large portion of its assets in common and preferred stocks of U.S. real estate investment trusts and real estate companies. CLARX's 3-year and 5-year annualized returns are 12.4% and 11.1%, respectively. CLARX carries a Zacks Mutual Fund Rank #2. The annual expense ratio of 1.28% is lower than the category average of 1.31%.
The MFS Global Real Estate Fund Class A (MUTF:MGLAX) invests the majority of its assets in the U.S. and foreign real estate-related investments. MGLAX's 3-year and 5-year annualized returns are 9.4% and 8.9%, respectively. MGLAX carries a Zacks Mutual Fund Rank #2. The annual expense ratio of 1.24% is lower than the category average of 1.46%.
The Davis Real Estate Fund Class A (MUTF:RPFRX) invests a large portion of its assets in securities issued by companies principally engaged in the real estate industry. RPFRX's 3-year and 5-year annualized returns are 12.5% and 10.8%, respectively. RPFRX carries a Zacks Mutual Fund Rank #1. The annual expense ratio of 0.94% is lower than the category average of 1.31%.
The Neuberger Berman Real Estate Fund Class A (MUTF:NREAX) invests a major portion of its assets in equity securities issued by real estate investment trusts and real estate companies. NREAX's 3-year and 5-year annualized returns are 11.1% and 9.7%, respectively. NREAX carries a Zacks Mutual Fund Rank #2. The annual expense ratio of 1.21% is lower than the category average of 1.31%.