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U.S. homebuilders seem positioned strongly, driven by falling mortgage rates and the potential for Fed rate cuts. This is especially true as mortgage rates dropped to a new low for the year after topping 7% earlier this year. Lower mortgage rates have led to increased housing market activity, leading to a rise in ETFs in recent weeks.

iShares U.S. Home Construction ETF (ITB - Free Report), SPDR S&P Homebuilders ETF (XHB - Free Report), Invesco Building & Construction ETF (PKB - Free Report), and Hoya Capital Housing ETF (HOMZ - Free Report) are up 3.8%, 2.4%, 0.4%, and 3.7%, respectively, over the past month. Will the smooth trend continue?

According to the latest Mortgage Bankers Association, the average rate for the 30-year fixed mortgage fell to 6.46% from 6.49% last week and from 7.23% recorded a year-ago period. This will likely ease affordability challenges for homebuyers in the coming months, prompting an increase in prospective buyers.

Expectations that the Fed will start cutting interest rates at its next meeting in September have buoyed the housing market in recent weeks. Cooling inflation readings and a slowdown in the labor market have bolstered the case for lower rates. Sales of previously owned U.S. homes increased in July for the first time in five months.

The Zacks Home Builders belongs to a solid industry, which is placed in the top 6% in terms of ranking among more than 250 Zacks industries. It is currently attractively valued with a P/E ratio of 9.42 versus 19.32 for the broader market index ETF (IVV - Free Report).

Reason to Worry

Applications to buy a home and refinance both dropped last week, indicating some cracks in the sector. Applications to purchase a home decreased 5% from last week, marking the lowest level since February, while applications to refinance an existing home loan fell 15%. Additionally, confidence among U.S. home builders slipped for the fourth consecutive month to the lowest level of 2024 in August due to a lack of affordability and buyer hesitation to venture back into the housing market, anticipating even lower rates.

Further, the supply of homes will remain challenged due to nearly 15 years of underproduction even if the Fed cuts interest rates.

ETFs in Focus

iShares U.S. Home Construction ETF (ITB)

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $3 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks with a heavy concentration on the top two firms. The product charges 39 bps in annual fees and trades in a heavy volume of around 2 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

SPDR S&P Homebuilders ETF (XHB)

SPDR S&P Homebuilders ETF provides exposure to homebuilders with a well-diversified exposure across building products, home furnishing, home improvement retail, home furnishing retail and household appliances. It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket.

SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with AUM of $2.1 billion and an average daily volume of 2.2 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.

Invesco Building & Construction ETF (PKB)

Invesco Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding 31 well-diversified stocks in its basket, with none accounting for more than 5.5% of the assets.

Invesco Building & Construction ETF has amassed assets worth $311.3 million and sees a lower volume of roughly 26,000 shares per day on average. Expense ratio comes in at 0.62%. Invesco Dynamic Building & Construction ETF has a Zacks ETF Rank #3 with a High risk outlook.

Hoya Capital Housing ETF (HOMZ)

Hoya Capital Housing ETF invests in 100 domestic companies involved across the U.S. housing industry, including rental operators, homebuilders, home improvement companies, and real estate services and technology firms, by tracking the Hoya Capital Housing 100 Index.

Hoya Capital Housing ETF has accumulated $45.3 million in its asset base and charges 30 bps in annual fees. The product trades in an average daily volume of 3,000 shares and has a Zacks ETF Rank #4 (Sell).

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