Following the upbeat December data, which reflected a 13-year surge in new U.S. home sales, the latest update on U.S. existing home sales also looks encouraging. The rise in U.S. existing home sales in December was largely backed by an increase in sales of multi-family housing units and gains in single-family homes.

National Association of Realtors (NAR’s) data showed a 3.6% rise in existing homes sales to a seasonally adjusted annual rate of 5.54 million units in December (the highest since February 2018). This compares favorably with 5.35 million units in November. Moreover, the metric beats Reuters economists’ forecast of a 1.3% rise to 5.43 million units. Furthermore, existing home sales rose 10% year over year. For 2019, existing home sales remained flat at 5.34 million units.

Accounting for about 90% of U.S. home sales, existing home sales were up in the Northeast, West and the South. Meanwhile, sales declined in the Midwest.

What’s Supporting the Momentum?

After three rate cuts in 2019, the Fed hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. It is widely believed that declining mortgage rates have helped the housing sector as lower borrowing costs are making new houses more affordable. Per Freddie Mac, the average rate on a 30-year, fixed-rate mortgage was at an average of 3.65%, comparing favorably with 4.94% in November 2018.

Moreover, residential investment regained momentum in the third quarter after shrinking for six consecutive quarters.

Lean Housing Inventories: Challenges Remain

Builders continue to bear the brunt of rising development and construction costs apart from trade woes. They are still grappling with regulatory burdens, deficit of lots and lack of skilled labor. These hurdles are affecting supply, which in turn, is disturbing the reasonable pricing of homes. In fact, there was an 8.5% year-over-year fall to 1.40 million in the number of previously-owned homes on the market in December.

Of late, a surge in home prices has been observed, which is eroding the benefits of low mortgage rates and thus affecting sales. The median existing house price rose 7.8% in December to $274,500 from last year's level (the highest since January 2016). In 2019, house prices rose 4.8%.

Moreover, in comparison to the 3.7 months needed to deplete the supply of homes in November, the latest data suggests that only three months will suffice at December’s pace. Notably, a six-to-seven-month supply is considered a healthy balance between supply and demand.

Homebuilder ETFs Poised to Gain

Against the backdrop, let’s take a look at a few homebuilder ETFs.

iShares U.S. Home Construction ETF (ITB - Free Report) — up 49.7% in the past year

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.18 billion, it holds a basket of 45 stocks, heavily focused on the top two firms. The product charges 42 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High-risk outlook.

SPDR S&P Homebuilders ETF (XHB - Free Report) — up 39.5%

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $815.3 million. The fund charges 35 bps in annual fees and has a Zacks ETF Rank of 3 with a High-risk outlook.

Invesco Dynamic Building & Construction ETF (PKB - Free Report) — up 42.5%

This fund follows the Dynamic Building & Construction Intellidex Index, holding well-diversified 30 stocks in its basket, with each accounting for less than a 5.29% share. It has amassed assets worth $109.9 million. Expense ratio is 0.60%. It is a Zacks #3 Ranked ETF with a High-risk outlook.