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Weak 2H Start to Home Sales: ETFs to Buy on the Dip?

Homes sales, be it existing or new, are off to a weak start to the second half. Existing home sales for the month of July plunged to the lowest monthly level of the year on less availability of properties that shot up prices (read: DHI Beats But Housing ETFs Tumble: Why?).

Existing home sales – which constitute a major portion of total sales – dropped 1.3% to a seasonally adjusted annual rate of 5.44 million units last month. This failed economists’ expectation of a 0.9% rise to a rate of 5.57 million units. Not only this, June's sales clip was revised slightly lower to 5.51 million units.

At the present sales rate, inventory clearing would take 4.2 months, down from 4.8 months a year ago. Economists see a six-month supply as standard demand-supply dynamics, as noted on

Coming to new home sales, the figure fell 9.4% to 571 thousand in July, marking the most acute one-month drop in about a year.  The figure fell below market expectations of 612 thousand. This was a trend reversal from the first half of the year.

Agreed, there are some positives in the sector. For example, the June home sales figure was upwardly revised from 610,000 units to 630,000. Sales so far this year are outstripping last year’s figure, as per the source. And, homebuilder sentiment among American homebuilders suddenly rose to a three-month high in August.

Still, higher material prices and shortage of labor and land cannot be overruled. U.S. home building fell 4.8% in July as construction of single and multi-family homes dropped. This indicates lackluster activity in the already under-pressure home inventory market.

Time to Buy ETFs on the Dip?

The subtle bearishness may cause a slack in housing ETFs over the coming days. Overall improvement of the housing sector also seems rocky as evident from home sales data (read: Rate Sensitive ETFs in Focus as Fed Meets).

However, the Fed remained dovish and yields are on the lower side at the current level. This may work wonders for the sector which thrives in a low rate environment. Investors should also note that the industry is well positioned from the Zacks Rank point of view as it is in the top 9% at the time of writing (read: 3 Bond ETFs to Buy Now).

Demand is steady in the sector, only supply issues are troubling the space. Pantheon Macroeconomics noted that "a rebound in August is a decent bet. Looking further ahead, the clear increase in mortgage demand in the spring suggests sales can rise to a new cycle high of perhaps 5.8 million by late summer or early fall, before dipping again towards the year-end.”

Housing ETFs include SPDR S&P Homebuilders ETF XHB (XHB) and iShares U.S. Home Construction ETF ITB. Both funds were off on August 24, the day data for existing home sales were released. Both funds have a Zacks Rank #2 (Buy).

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