Home-building ETFs Surge as Treasury Yields Decline

Exchange-traded funds (ETFs) that focus on the home-building industry are experiencing a notable surge on Thursday following a drop in Treasury yields after the Federal Reserve’s policy meeting on Wednesday. According to FactSet data, the iShares U.S. Home Construction ETF (ITB) has soared approximately 6.1% on Thursday afternoon, while the SPDR S&P Homebuilders ETF (XHB) has recorded a jump of 5.5%. Both funds are currently on track to achieve record highs, as reported by Dow Jones Market data.

Homebuilder Valuations on the Rise

Analysts at BofA Global Research note in a recent analysis that homebuilder valuations have seen a significant increase over the past two months. This surge comes as the yield on the 10-year Treasury note dropped by one percentage point since October 19. As per BofA, this recent re-rating is warranted and may continue due to the potential positive effects of lower rates on new home sales and the profit margins of home builders.

Declining Treasury Yields

According to FactSet data, the yield on the 10-year Treasury note was trading around 3.93% on Thursday afternoon, marking a decline from the previous day’s closing rate of 4.032%. Wednesday’s rate was the lowest yield observed since August 9 at 3 p.m. Eastern time, according to Dow Jones Market Data.

The Federal Reserve’s Stance

In its policy statement on Wednesday, the Federal Reserve announced it would maintain its policy rate but indicated that it could potentially cut rates by three-quarters of a percentage point in 2024, as stated in its summary of economic projections. The BofA analysts believe that lower rates could act as a tailwind for return on equity for home builders in 2024.

Homebuilder Stocks: A Two-Year Outperformance

Despite higher mortgage rates, homebuilder stocks have displayed strong performance over the past two years, with supply constraints playing a significant role in outperforming demand. The ability of homebuilders to effectively utilize mortgage rate buydowns has also helped counter affordability challenges. However, builders may now consider reducing incentives as mortgage rates decline, ultimately boosting their margins, as indicated by a note from BofA.

Prominent Holdings

According to data on BlackRock’s website, as of December 13, the top three holdings of the iShares U.S. Home Construction ETF were D. R. Horton Inc., Lennar Corp., and NVR Inc. Similarly, the SPDR S&P Homebuilders ETF had significant exposure to Williams-Sonoma Inc., D.R. Horton, and Lennar on the same date, according to the fund’s holding data on the website of State Street Global Advisors.

Lennar’s Quarterly Earnings Release

Lennar, a prominent home builder, is set to disclose its quarterly earnings results for the period ending November 30. The announcement will be made after the market closes on Thursday. Interestingly, Lennar’s bonds have already started gaining value ahead of the Federal Reserve’s recent announcement, according to BondCliQ.

Surging Performance

While the S&P 500 has experienced a year-to-date rally of nearly 23% as of Thursday afternoon trading, the iShares U.S. Home Construction ETF has seen substantial gains of approximately 69%, and the SPDR S&P Homebuilders ETF has soared by over 58%, as reported by FactSet data.

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