Homebuilder ETFs Bringing Record Returns

Homebuilder ETFs have seen record returns so far this year, as high interest rates have unusually boosted the demand for new housing despite rising mortgage costs as sellers stay put. 

The two largest homebuilder ETFs, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB), returned 43.2% and 37.2%, respectively, year to date, handily beating out the 18.8% for the broader market as represented by the iShares Core S&P 500 ETF (IVV). Even the Technology Select Sector SPDR Fund (XLK) buoyed by the rally in tech stocks is up only 41.6% so far this year, still less than ITB. 

Bucking a Trend 

This trend flies in the face of conventional wisdom regarding homebuilder ETFs, which usually suffer when rates rise. This held true last year as the Fed jacked up rates and ITB and XHB fell by more than 27% through July 24 last year, versus a 16.6% decline in the S&P 500. This is because rising rates make mortgages more expensive for homebuyers, usually suppressing demand.  

However, the sale of existing homes has been suppressed even more, as existing homeowners are even more reticent to sell, and give up the much lower mortgage rates many have. Existing home sales fell year over year every month this year according to the latest data from the National Association of Realtors, with the June numbers down 18.9% versus June 2022. The most recent data on new home sales showed a 20% year-over-year rise in May, compared to a 20% drop for existing home sales.  

Another reason the housing market has held up is that unemployment has remained low despite rate hikes and recession fears, which means fewer people are forced to sell due to job losses. 

In an earnings press release last month, Stuart Miller, executive chairman of homebuilder Lennar Corp., said “… demand has accelerated, leaving the market to reconcile the chronic supply shortage derived from over a decade of production deficits. Simply put, America needs more housing.” Lennar posted earnings that handily beat expectations. 

Potential Turnaround 

Earnings by another major homebuilder, D.R. Horton Inc., were released last week, and despite beating earnings expectations, the stock has been dropping. One reason was third-quarter orders: The firm did not meet what analysts had expected. XHB and ITB are down by 1.5% and 1.9%, respectively, over the last week, having both fallen on Horton’s earnings news.  

Earnings from homebuilders PulteGroup Inc. and NVR Inc. are expected to report earnings Tuesday, which will give more of an idea of whether Horton was a one-off or part of a broader trend. 

Contact Gabe Alpert at [email protected]