Three takeaways

  1. Low mortgage rates are helping drive housing upgrades amid the pandemic
  2. Home sales, optimism about new construction and lumber prices all are rising
  3. Index-tracking equity exchange traded funds (ETFs) can offer focused exposure to trends in home construction and building materials

Home builders and home improvement retailers are showing strength in an uncertain U.S. economy.

Families are seeking indoor and outdoor spaces to better accommodate work and school from home. Many more Americans are taking on new renovations and do-it-yourself home improvements, opting to spruce up the home front instead of dining out or taking vacations, according to major retailers.1

The evidence is clear: Home sales have surged, builders are historically optimistic about new construction, and prices for lumber are on the upswing. The July’s reading on sales of previously owned single-family homes, townhomes, condos and co-ops rose nearly 25% from June — the strongest monthly gain ever recorded.2 Confidence in new single-family home construction rose in August for a third straight month and matched the highest level in its 35-year history.3

Home builder confidence index

Chart: Home builder confidence index

Source: The National Association of Home Builders (as of Aug. 17, 2020).

Importantly, housing demand has benefited from lower borrowing costs for prospective homeowners. U.S. central bankers earlier this year anchored their policy rate near zero to help cushion the pandemic shock and current market pricing shows that interest rates are expected to stay low for some time — helping keep long-term borrowing rates for prospective home buyers pinned lower.4 In July, the average rate on 30-year fixed mortgage dipped below 3% for the first time.5

Average 30-year fixed mortgage rate (%)

Chart: Average 30-year fixed mortgage rate (%)

Source: Federal Reserve Bank of St. Louis (as of Aug. 31, 2020).

To be sure, continued weakness in other parts of the economy could curb future appetite for new and existing homes, and potentially diminish the willingness of consumers to fund renovations. The U.S. unemployment rate remains above 10%, reflecting how much activity has been curtailed as a result of the pandemic.6 And, while U.S. real personal disposable income grew at a record 44.9% annual rate in the second quarter of 2020, this growth was entirely due to fiscal transfers, primarily stimulus payments and unemployment insurance. Stripping those out, real disposable income fell by 22.3% — a record contraction.7

Spotlight on lumber

Supply and demand imbalances are acutely evident in the markets for wood products, where lumber prices are surging in the face of strong demand from builders. Early this year, prior to the recent housing boomlet, North American sawmills — anticipating an economic contraction — slowed production lines.8 Lumber output in the U.S. was essentially flat in the first five months of 2020, and fell 16% in Canada over the same period.9 The mix of low inventories and strong demand have helped lumber prices rise roughly 100% year to date and a lumber pricing benchmark recently topping $800 per thousand board feet for the first time.10

Lumber futures

Chart: Random length lumber futures Price per per thousand board feet

Source: Nasdaq (as of Aug. 28, 2020). Subject to change.

Accessing home-construction opportunities with index-tracking equity ETFs

Diversified stock funds can help investors seek exposure to housing trends in a simple way. Shares of building companies, home improvement retailers and wood product producers all offer the potential for long-term growth in an environment of low mortgage rates and strong demand for roomier digs.

For U.S. investors, ETFs that seek to track an index can offer efficient and cost-effective access to shares of the companies with business exposure to trends in home construction and basic materials.

Chris Dieterich
Chris Dieterich
Director
ETF Strategist and Commentator
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