When the U.S. housing market was at its frothiest a decade ago, new home buyers were spending half of their monthly paycheck on mortgage payments and mortgage insurance. In hindsight, that level was clearly unsustainable.
The resulting housing crash still casts a long shadow these days, as the percentage of Americans owning their homes hovers around 63 percent, the lowest level since 1965, according to the St. Louis Fed.
Yet from a much lower base, more renters are once again opting to take the home ownership plunge. The Commerce Department recently reported that sales of new homes have risen 12.4 percent in the first seven months of 2016, to the highest seasonally-adjusted rate since 2007.
New home construction may strengthen yet further in coming years. While roughly 600,000 new homes are now being built each year, that figure should rise to 750,000 by 2019, according to Morningstar’s analysts. That figure would be right in line with the 40-year average.
Why are sales of new homes on the rise? Credit goes to a key purchasing metric. According to Credit Suisse, a typical mortgage payment now consumes a more reasonable 35 percent of median income, which is at the low end of the 30-year range. And that figure would drop to 32 percent by 2018 if wages continues to strengthen and mortgage rates stay constant.
That makes this a good time to re-visit the exchange-traded funds that focus on homebuilders and related goods providers. For investors, the top three ETFs in terms of asset each brings a unique approach to the sector.
The iShares U.S. Home Construction ETF (ITB), which carries a 0.44 percent expense ratio, is mostly focused on the homebuilders themselves such as D.R. Horton Inc., Lennar Corp. and PulteGroup.
Reflecting the tough environment for these firms, the iShares fund has lost roughly 2.7 percent annually over the past decade. This sector stumbled badly during the Great Recession of 2008, although the 7.7 percent average gain over the past three years points to a tentative rebound.
Todd Rosenbluth, ETF research director at S&P Global Market Intelligence, appreciates the fund’s market-cap weighted approach. “This allows it to wisely focus more of its assets on the nation’s biggest homebuilders.”
Still, a narrow focus on just home builders may not be the best way to play the sector. The SPDR Homebuilders ETS (XHB) takes a much broader approach. This fund, which carries a 0.35 percent expense ratio, has 30 percent of its assets invested in firms that make building products, such as Masco Corp and Owens-Corning, and another 30 percent invested in home-improvement retailers such as Home Depot, appliance makers like Whirlpool and home-furnishing companies such as Williams-Sonoma.