Homebuilder ETFs have achieved record returns thus far this year as high interest rates have surprisingly increased demand for new homes despite growing mortgage costs as sellers stay put. The two biggest homebuilder exchange-traded funds, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB), have returned 43.2% and 37.2%, respectively, …
Homebuilder ETFs have achieved record returns thus far this year as high interest rates have surprisingly increased demand for new homes despite growing mortgage costs as sellers stay put. The two biggest homebuilder exchange-traded funds, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB), have returned 43.2% and 37.2%, respectively, year to date, significantly beating out the 18.8% return for the whole market, as represented by the iShares Core S&P 500 ETF (IVV). Even the Technology Select Sector SPDR Fund (XLK), which has benefited from the rally in tech stocks, is only up 41.6% so far this year, trailing ITB in growth.
This trend contradicts widely held beliefs that homebuilder ETFs suffer when interest rates rise. This was also true the year before when the Fed increased interest rates, causing ITB and XHB to decrease by almost 27% through July 24, compared to a 16.6% decline in the S&P 500. This is because rising rates increase the cost of mortgages for homeowners, which often reduces demand. The selling of existing homes has been suppressed even more, as current homeowners are increasingly reluctant to sell and give up the significantly reduced mortgage rates that many of them already enjoy. The National Association of Realtors’ most recent statistics shows that existing house sales decreased monthly from June of last year to June of this year, a decrease of 18.9%. In May, new home sales increased 20% year over year, according to the most recent data, while existing home sales decreased 20%.
Another reason the housing market has held up is that, despite rate increases and recession fears, unemployment has stayed low, which means fewer individuals are being compelled to sell because of job losses. Stuart Miller, executive chairman of homebuilder Lennar Corp., stated in a news statement last month that “…demand has quickened, leaving the market to reconcile the chronic supply deficiency resulted from over a decade of production deficits. Simply put, America requires more housing.” Lennar reported earnings that easily above predictions.
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