Housing ETFs Stay Depressed Amid Falling Sales

The housing market continues to cool amid a spike in mortgage rates and record-high home prices, according to the monthly report from National Association of Realtors (NAR). The sales of existing homes—or those homes that were owned and occupied prior to coming on the market—fell by 5.4% in June compared with the month before. That’s the fifth straight monthly decline.  

At an annualized 5.12 million units, the number of homes sold in June was down 14.2% year over year. 
 

Sources: National Association of Realtors, Bloomberg 

NAR Chief Economist Lawrence Yun attributed continued decline in home sales to poor housing affordability despite greater availability, noting that “both mortgage rates and home prices have risen too sharply in a short span of time.” The average rate on a conventional 30-year fixed-rate mortgage in June was 5.52%, up from 2.96% a year ago. At the same time, the median house price in the U.S. was $416,000 in June, a record high, and 13.4% above the year-ago level. 

Meanwhile, the NAR said that the inventory of unsold existing homes in June was 1.26 million, an increase of 2.4% from last year. Based on current levels of demand, that equals three months of supply—up from recent lows but still depressed historically. 
 

Sources: National Association of Realtors, Bloomberg 

NAR also said that homes stayed on the market for an average of 14 days in June, down from 17 days a year ago and the fewest days on the market since at least 2011. 

“The record-low pace of days on market implies a fuzzier picture on home prices,” Yun noted. “Homes priced right are selling very quickly, but homes priced too high are deterring prospective buyers."  

The latest data also suggests that the underlying demand for housing is still very strong as long as prices are reasonable, but prices are close to the point where people can’t afford to buy a house, no matter how much they stretch their budgets.  

In any case, it’s hard to imagine a collapse in home prices, given how quickly houses are still selling and how low inventories are.  

Going forward, mortgage rates might play a big factor in where prices go over the next year or two. If they continue to spike, that’s going to make houses even more unaffordable and will pressure prices. But if they stay here or come down, they could keep prices supported. 

According to NAR’s data, while the growth in home prices has slowed, they are still at record levels. 

Housing-Related ETFs Struggle  

Unlike housing prices, housing-related ETFs are under pressure this year. Everything from the iShares Residential and Multisector Real Estate ETF (REZ) to the iShares U.S. Home Construction ETF (ITB) to the Hoya Capital Housing ETF (HOMZ) is lower this year, swayed by the decline in homebuying activity rather than resilient home prices.  

As of July 20, REZ was down 17% so far this year; HOMZ declined by 22.7%; and ITB retreated 29%—though all three of the ETFs rallied in recent weeks along with the broader stock market.  

Sources: National Association of Realtors, Bloomberg 

ITB has a direct focus on homebuilders, with two-thirds of its portfolio allocated to stocks in that category, like D.R. Horton Inc., Lennar Corp. and NVR Inc. Building products and home improvement retailer stocks are the next biggest groups in the ETF, making up about a quarter of the fund. Companies like TopBuild Corp. and Home Depot Inc. are included in that part of the portfolio.  

REZ is a REIT ETF that is heavily allocated to residential REITs. About half of its portfolio is in that category, which includes REITs that rent out apartments and single-family homes. REITs are required by law to pay out 90% of their taxable income as dividends to shareholders.  

Finally, HOMZ doesn’t fit the typical sector or industry classification mold. It uses a proprietary index that combines residential REITs (30% weighting), homebuilders (30%), home improvement companies (20%) as well as housing technology companies (20%). Zillow Group Inc. and Redfin Corp. are two companies included in the latter group. 

Follow Sumit on Twitter @sumitroy2