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An improving economy and an impressive recovery in the housing market boosted the U.S. homebuilder sentiment in June to a nine-month high. The National Association of Home Builders (NAHB)/Wells Fargo housing market index rose five points from May to 59 in June, in line with the September 2014 reading. The September’s reading was the highest since Nov 2005. The sentiment also exceeded the market expectation of 56 points. Meanwhile, the report also showed that the index that measures sales expectations for the next six months jumped six points to 69 in June. Also, the index measuring buyer traffic increased five points to 44. Moreover, the report revealed that the three-month moving average indexes in the South, Northeast and West witnessed a healthy increase in June. Though the index declined in the Midwest to 54, the reading above 50 indicated that builders were still optimistic for the region. All of these data show that the housing market is set for a strong performance this year overcoming the negative impact of a harsh winter in the first quarter. The Chief Economist at NAHB David Crowe said that readings “are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead.” Impressive Housing Recovery Most of the major housing data that released in May were encouraging. While new home sales surged 6.8% in April, construction spending soared to a more than six-year high. Also, Pending Home Sales Index, which measures housing contract activity, gained 3.4% from the previous month to 112.4 in April, hitting its highest level since May 2006. Existing home sales were the only major housing data that failed to increase in April. However, it is speculated that existing home sales in 2015 may reach the highest level since 2006. Separately, a rise in home prices also signaled toward an increase in demand in the housing market. The S&P/Case-Shiller’s 20-City composite index, the leading measure of U.S. home prices, rose 5% year on year in March. Similarly, the 10-City composite index increased 4.7% year on year in March. Economic Improvement After the first-quarter slowdown, several indicators signaled that the economy is gradually gaining strength. According to the U.S. Labor Department, the U.S. economy created a total of 280,000 jobs in May, witnessing the largest job addition since December 2014. Though the unemployment rate marginally rose to 5.5% in May, the rate is expected to decline gradually to Fed’s target this year. Average hourly wages also saw an impressive year-on-year gain of 2.3%, indicating a strong recovery in labor market conditions. Moreover, factors including improving consumer confidence, low oil prices and the prevailing low rate environment have boosted the housing market in recent times. Despite the prospect of a rate hike this year, the outlook for the housing market remains positive for the year. Rising Rate Concerns The mortgage-finance company Freddie Mac reported that the average rate for a 30-year fixed mortgage climbed to an eight-month high of 4.04% for the week ending June 11 from 3.87% from the previous week. This represents the sharpest increase since 2013. However, increase in mortgage rates seems to have a negligible impact on housing as demand remained strong following the concern that rates will continue to move higher. Meanwhile, strong economic data indicates that the economy is back on track in the second quarter, leaving behind the first quarter contraction. This raised the possibility of a rise in interest rates, which have been near zero since the 2008 financial crisis. Analysts are expecting a possible rate hike in September or October this year, which may have a negative impact on the housing market. ETFs in Focus Homebuilder ETFs may see a boost in the near future on the back of a favorable economic environment. However, investors will closely watch the prospect of a rate hike this year and its impact on the housing market. In this scenario, we highlight two homebuilders ETFs that will remain on investors’ radar in the coming days. SPDR S&P Homebuilders ETF (NYSEARCA: XHB ) This fund provides exposure to 37 firms by tracking the S&P Homebuilders Select Industry Index. The fund is also quite popular with $1.7 billion in its asset base while it sees a solid volume of more than 4 million shares a day. None of the firms accounts for more than 3.72% of the total assets. Sector-wise, Homebuilding takes the top spot at about 33% share while Building Products, Homefurnishing Retail and Homefurnishings also have double-digit allocation. XHB charges a fee of 35 bps annually and has a Zacks Rank #3 (Hold) with a High risk outlook. The fund has returned 2.3% over the past three-month period and rose 6.7% this year. PowerShares Dynamic Building and Construction (NYSEARCA: PKB ) This product tracks the Dynamic Building & Construction Intellidex Index, holding 30 securities in its basket. The fund charges 63 bps in fees. Nearly 46% of the fund’s assets are allocated to the top 10 holdings. PKB has amassed $54.5 million in its asset base while it has an average daily volume of around 15,000 shares. The product has a Zacks Rank #3 with a High risk outlook. The ETF has returned 4.2% over the past three-month period and gained 11% in the year-to-date frame. Original Post Scalper1 News
Scalper1 News