Over the past two years, few if any sector
have rivaled the iShares Dow Jones U.S. Home Construction Index
) and the SPDR S&P Homebuilders ETF (NYSE:
). Since April 26, 2011, ITB and XHB have returned an average of
almost of 75 percent, or better than triple what the SPDR S&P
) has offered over the same time frame.
Along the way, there have been ample calls saying that ITB,
XHB and their constituents were overbought and that the
homebuilder rally was getting long in the tooth. While these ETFs
certainly did not move up in a straight line, the charts indicate
that every legitimate dip over the past 24 months has been a
credible buying opportunity.
Despite all the ebullience, S&P Capital IQ sees risks
looming for ITB and XHB.
"In short, while we do expect continued improvement in the
housing market in 2013, we think there are several factors that
could derail this recovery," said the firm in a new research
note. "Briefly, in terms of demand, weakness in the labor market
and the burden of student loan debt has impeded household
formation. In fact, despite record low interest rates boosting
affordability (a byproduct of the Federal Reserve's easy money
policy), there has been a dearth of first-time homebuyers - a
group we think is needed for a more sustainable recovery.
Instead, recent demand has been bolstered by investors, who tend
to be fickle and highly sensitive to changes in interest
Year-to-date, ITB, the smaller of the two ETFs with $2.33
billion in assets under management, has soared 15.5 percent. XHB,
which has $2.77 billion in assets, is up 14.8 percent.
has been previously noted
, ITB and XHB go about their business differently. XHB is home to
37 stocks with none receiving a weight in excess of four percent.
Additionally, this ETF is more leveraged to the discretionary
side of real estate with holdings such as Bed Bath & Beyond
) and Williams-Sonoma (NYSE:
). Only four of XHB's top-10 holdings are pure-play
While ITB does feature some exposure to the likes of Home
) and Lowe's (NYSE:
), the ETF is the more direct approach to homebuilders. For
example, DR Horton (NYSE:
), Pulte (NYSE:
) and Lennar (NYSE:
) combine for about 30 percent of the ETF's weight.
Beyond specific holdings, S&P Capital IQ sees risks
regarding delinquent mortgages. Citing Lender Processing
Services, the research firm said: "There are still 5.1 million
properties that are either 30 days or more delinquent on their
mortgage or in the process of foreclosure, representing 6.8% of
all mortgage loans in the country. This includes 1.69 million
homes that are currently in some stage of foreclosure, nearly
matching the 1.93 million homes that the National Association of
Realtors says were available for sale in March."
Adding to the potentially dangerous situation for ITB and XHB
is rising foreclosures could cap upside for home prices while
meaning a flood of new inventory could come to market.
"Rising home prices could cause banks to release their
foreclosed properties from their inventories at a faster rate,
and could also allow many underwater homeowners the chance to
sell their homes. As a result, we think there will likely be a
ceiling in terms of how fast prices can rise, because it will
induce more supply to hit the market," according to S&P
Important technical levels to watch on ITB would be $23 and
$21 on the downside. For XHB, the chart shows $28 and $26 as
prominent support areas. S&P rates ITB Underweight and XHB
For more on ETFs, click
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