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5 Reasons Why Housing ETFs Could Gain in Q4

The U.S. housing market was very strong last year despite high home prices. However, the space started to cool off this year on rising mortgage rates, which put pressure on affordability and quelled demand. This, in turn, forced sellers to lower prices.

Home Prices Falling Fast Leading to Higher Affordability

As a result, U.S. home prices are falling at the fastest monthly pace since the Great Recession. Median home prices dropped 0.98% in August from a month earlier, following a 1.05% decline in July, mortgage analytics firm Black Knight said in a recent report, as quoted on Yahoo Finance.

Though home price growth has cooled over the past month, prices still remain at an elevated level. According to the real estate brokerage firm Redfin, in August 2022, U.S. home prices were up 6.9% compared to last year over year, selling for a median price of $406,452.

On average, the number of homes sold was down 18.0% year over year and there were 557,827 homes sold in August this year, down 680,509 homes sold in August last year. Still, there is a ray of hope. New home sales unexpectedly jumped in August, with new single-family home purchases jumping nearly 29% (read: Should You Buy Housing ETFs On Falling Prices?).

Will Rates Cool Down in Q4?

Plus, U.S. benchmark treasury yield has shown a downtrend to start October. It means that declining rates and increasing affordability (which should not affect homebuilders’ margins much) should result in higher home sales.

Jump in Rents Slightly Lower Than Jump in Home Prices

The year-over-year change in typical rent in August 2022 was 12.3%, per Zillow Research. On the other hand, the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 15.8% year-over-year in July (non-seasonally adjusted). With an increase in rent slightly lower than an increase in home prices, people may want to go for ownership.

Consumers Still Have Spending Power?

Though inflation is a concern, consumers are still sitting on huge savings. According to Wells Fargo, consumers had accumulated as much as $2.1 trillion in excess savings during the peak of the pandemic helped by fiscal support and lack of spending options amid lockdowns. That’s a huge sum in an economy with $25 trillion in annual GDP. Though these savings are rapidly declining amid high inflation, consumers still have $1.3 trillion in extra spending power as of August, as quoted on Yahoo Finance.

Home Buying: Millennials’ Preference

Though the percentage of millennials staying with their parents has risen over the years, many millennials are now reaching prime home-buying age — 30 to 35 years old — and that could drive sales for homebuilding companies.

John Lovallo, home builder analyst for Bank of America Merrill Lynch, noted that “in 2025 there are going to be 3 million more millennials than baby boomers at their peak in 1987,” which could propel the home-buying industry.

ETFs in Focus

Against this backdrop, we expect homebuilding ETFs like iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB and Hoya Capital Housing ETF HOMZ to gain ahead. All three ETFs have a Zacks Rank #3 (Hold).

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
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