Homebuilder ETF Priced In Weaker Home Sales

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The latest housing data released Monday further confirm what homebuilder ETFs started warning the stock market months ago: Sales are slowing.

The Pending Home Sales Index fell a fourth straight month in September, sliding 5.6% month to month and 1.2% year to year to a reading of 101.6. It undercut consensus expectations of flat sales.

The sales slowdown comes as rising prices amid shrinking inventory and fattening mortgage rates are making it ever more difficult for people to afford the American dream.


IShares U.S. Home Construction ETF ( ITB ), peaked in May and trades 11% below its 52-week high, while SPDR S&P 500 ( SPY ) kisses new historic highs daily. That suggests investors in ITB started pricing in weak sales five months ago. ITB, last year's top-performing ETF with a 79%, has returned merely 9% year to date, while SPY gained 24%.

SPDR S&P Homebuilders ( XHB ) has climbed nearly 17% year to date. It holds many of the same homebuilders as ITB in addition to home improvement and furnishing retailers. Both ITB and XHB are among very few ETFs that are still a far cry from regaining their pre-bear market peaks.

Sales tumbled the most in the Northeast, 9.6%, and West, 9%, the National Association of Realtors reported. The indicator based on contract signings hovers at its lowest level since December 2012.

"The data can be volatile, but there has clearly been some genuine slowing," Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., wrote.

Lawrence Yun, chief economist at the NAR, attributed part of decline to the government shutdown as workers and contractors were laid off without pay and the uncertainty hurt consumer confidence.

Credit Suisse projects overall pending home sales will increase 7% to 4.99 million this year after jumping 9% in 2012. Sales are expected to rise 6% to 5.29 million in 2014. Although 2014 would mark the fourth straight year of rising sales, they would still remain 25% below their 2005 peak.

"This as a brief blip in the context of the overall housing recovery that we expect to pick back up at the turn of the year, as we begin to exit the seasonally slower months of the fall/winter and start to enter the spring selling season," Credit Suisse analysts wrote in a report.

The median price for existing single-family homes fell 5% month to month in September but rose 11.4% year to year to $199,300, according to Credit Suisse.

Affordability, currently at a five-year low, has been the major culprit hindering sales growth as mortgage rates climbed 1 percentage point over the summer, according to IHS Global Insight. What's more, scarcity of distressed sales makes it harder for prospective buyers to find deals.

"Since incomes have not improved at the pace of the recovery in housing prices, flood insurance rates are rising and credit remains fairly tight, many would-be homeowners are putting off the purchase until conditions improve," Stephanie Karol, U.S. economist at IHS, wrote. "When mortgage rates declined in late September, it was not enough to entice more would-be buyers to sign contracts. Fiscal uncertainty loomed, dampening consumers' attitudes towards making a major purchase.

"The mortgage approval process is a slow one, and many applications that were filed several months ago have yet to be approved," Karol added. "We anticipate existing-home sales to decline in the fourth quarter."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: ITB , SPY , XHB

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