Source: CapitalCube ETFs
The Housing Market’s Spring Thaw
In mid-March we suggested that the winter slowdown in housing was only temporary. Until recently, housing stocks oscillated on a mix of economic news. However, in the past 2 weeks, housing data has picked up again, and the sector helped push the S&P 500 to a record high.
The most recent data indicate a rebound in housing activity in the second quarter. April’s housing starts jumped to 1.072 million from 946 thousand in March, and up 26.4% on a year-over-year basis. The surge was led by multifamily units, which were up about 40% from March to April. Geographically, the Midwest – which was hit hardest by the severe winter weather – rebounded strongly. On May 23, data showed new home [glossary_exclude]sales[/glossary_exclude] jumped to 433 thousand in April from 407 thousand in March (revised up from 384 thousand).
There remain, however, significant hurdles in the housing market. According to Jonathan Miller, president and CEO of Miller Samuel, there tends to be more supply at the top end of the market, but there is still a supply shortage in an affordable price range for middle class households. Additionally, Zillow reports that 19% of homeowners are still underwater; Miller estimates that an additional 20% or so have low equity, resulting in a full 40% of homeowners who do not qualify for a mortgage for the next home transaction. This is clogging up the system and constraining both supply and demand.
At the same time, there has been a sharp slowdown in household formation. The chief economist at Trulia estimates there are 2.3 million “missing” households. A major contributor to this trend is that younger people are now more likely to live with their parents. Simultaneously there has been a shift in demand towards multifamily units, which are now being built at a more rapid pace than the pre-recession peak.
What does this mean? From a macro perspective, the current market dynamics continue to put upward pressure on prices, but less so on construction volumes and all of the secondary and tertiary beneficiaries of home building (e.g., construction jobs and [glossary_exclude]sales[/glossary_exclude] of home goods and appliances). On balance, housing is getting back on track after a rough winter and will outgrow the rest of the economy for another 1-2 years. Homebuilders positioned in the apartment market will benefit the most from current trends. In my past article I focused on individual stocks – below are a few brief comments on construction ETFs based on Capital Cube’s analytical tools.
iShares U.S. Home Construction ETF (NYSE Arca:ITB)
The iShares Dow Jones U.S. Home Construction Index Fund seeks investment results that correspond generally to the price and yield performance before fees and expenses of the Dow Jones U.S. Select Home Construction Index. This fund is generally viewed as having the best representation of the entire industry. For example, the largest holdings include the major home builders, and building supplies stores – Lennar, D.R. Horton, Toll Brothers, Home Depot, and Lowe’s to name a few. The expense ratio of 0.47% is about [glossary_exclude]average[/glossary_exclude] compared to its [glossary_exclude]peers[/glossary_exclude].
The majority of ITB constituents have above average CapitalCube scores. However the underlying drivers are a combination of strong valuations, capital investment strategy, and balance sheet quality rather than strong growth expectations. I view this as an opportunity to take advantage of an upside growth surprise. This, of course, is based on my conviction that the risk of a downside growth surprise is low; I place a significantly higher probability on the U.S. experiencing an upward shift in macroeconomic momentum later this year.
SPDR S&P Homebuilders ETF (NYSEArca: XHB)
The SPDR S&P Homebuilders ETF before expenses seeks to closely match the returns and characteristics of the S&P Homebuilders Select Industry Index. The fund is equal weighted, which dilutes the influence of home builders which make up less than a third of the overall portfolio. The fund also invests in “trickle down” industry names like Williams-Sonoma, Restoration Hardware, Aaron’s – all top 10 holdings and have relatively strong growth expectations.
Like ITB, the majority of the fund’s constituents have above average CapitalCube scores. However earnings leverage is one of the main drivers. Also like ITB, I view these trends as a buying opportunity. The addition of consumer goods stocks could give XHB an upside boost – these companies will benefit from the recovering housing market and a bonus effect from stronger overall economic growth (specifically, a recovering job market and stronger consumer spending).
The views and opinions expressed above are those of the author and do not necessarily reflect the views of CapitalCube.com, AnalytixInsight, Inc., its affiliates, or its employees.