3 ETFs Riding Housing Sales Surge

Rarely has the U.S. housing market been so strong. Last week, the National Association of Realtors (NAR) released data on existing home sales that showed a booming market, unlike anything seen since the housing bubble burst in 2006.

According to NAR, existing home sales spiked 9.4% month over month in September to a seasonally adjusted annual rate of 6.54 million.

That puts home sales 21% higher than the year-ago level and at their loftiest point since May 2006. As can be seen from the chart below, this sales acceleration leaves the housing market in rarified air.

US Existing Home Sales

Other data points released by NAR paint the same story of a housing market firing on all cylinders.  In September, housing prices were up 15% year over year, according to the association, and housing inventories hit a record-low 1.47 million units, equal to 2.7 months of demand (also a record low).

Lawrence Yun, chief economist of NAR, attributed the strength in the market to low interest rates and the pandemic environment.

"Home sales traditionally taper off toward the end of the year, but in September they surged beyond what we normally see during this season," he said. "I would attribute this jump to record-low interest rates and an abundance of buyers in the marketplace, including buyers of vacation homes given the greater flexibility to work from home."

Bullish Homebuilding Environment

Robust demand and tight housing supply bode well for the builders of new homes. Every incremental new house on the market is likely to be sold quickly in this environment. It’s why we’ve seen a run to record highs for the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB), which are up 27.9% and 23.7%, respectively, this year.

ITB, which is a market-cap-weighted fund with $2.4 billion in assets under management, holds two-thirds of its portfolio in homebuilder stocks like D.R. Horton, Lennar and NVR Inc. Building products and home improvement retailer stocks, such as TopBuild and Home Depot, make up about a quarter of the fund.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Meanwhile, the equal-weighted XHB, with $1.5 billion in assets, holds 37% of its portfolio in building products, 29% in homebuilders; 20% in home improvement and home furnishing retailers; and the rest in home furnishings and household appliance manufacturers.

According to NR’s Yun, homebuilders have moved “to ramp up supply,” but there is “a need for even more production,” making for a bullish environment for the industry.

Housing ETF Newcomer

While homebuilders are the traditional beneficiaries of a booming housing market, a new breed of companies has evolved to facilitate the homebuying process in the digital age. Companies like Zillow and Redfin, which provide home discovery, home listing, brokerage and iBuying services, have hit record highs in the past few months.

The Hoya Capital Housing ETF (HOMZ), a 1-1/2-year-old fund with $36 million in assets, holds a notable 20% of its portfolio in companies like these. This bucket of housing-related “home financing, technology and services” companies also includes mortgage lenders and servicers, as well as property, title and mortgage insurers.

Another 20% of HOMZ’s portfolio is in home improvement and furnishings companies, which not only includes mainstays like Home Depot, but digital newcomers like Wayfair.

About 30% of HOMZ’s holdings are allocated to homebuilders and construction stocks, and 30% is in home ownership and rental operations, primarily residential real estate investment trusts.

This eclectic mix of housing-related holdings has fueled HOMZ to an 8.3% gain for the year, in line with the 8.9% gain for the S&P 500 in the same period.

YTD Returns

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2