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Homebuilder ETFs Rally After Fed Tapers Stimulus

By: Investor's Business Daily
Posted: 12/18/2013 6:00:00 PM
Referenced Stocks: ITB;XHB

Homebuilders provided the foundation for a robust stock market rally Wednesday following the Federal Reserve's announcement that it would slowly scale back its monthly bond purchases from $85 billion a month to $75 billion starting in January.

IShares U.S. Home Construction ( ITB ) outpaced all equity ETFs, jumping 3%.SPDR S&P Homebuilders ( XHB ) added 2.6%.

Homebuilder ETFs gapped up at the open on news that housing starts eclipsed consensus forecasts. They drifted lower the rest of the morning and suddenly spiked again after the Fed news.

Tapering suggests the economy is improving and strong enough to lift sales, despite rising mortgage rates. "(Interest) rates are going to go up because the economy is doing better, not because the Fed is buying fewer bonds," said Paul Edelstein, economist at IHS Global Insight.

Short covering, in which traders have to buy shares to close their positions, could have fueled the move, said Jason Schenker, president of Prestige Economics in Austin, Texas.

Housing starts surged to an annualized monthly pace of 1.09 million in November, up a hefty 23% from 889,000 in October and 14% higher than consensus forecasts of 955,000. They vaulted nearly 30% year over year to their highest level since February 2008. Single-family home starts and multifamily starts rose 21% and 27%, respectively.

Housing permits dipped 3% to 1.007 million in November from 1.039 million in October, while rising 8% from the year-ago period. The rate was nearly 2% higher than Wall Street expectations of 990,000. Multifamily housing permits fell 11% while single-family permits rose 2%.

The housing market index -- a gauge of builders' outlook on single-family home sales and expectations for the next six months -- improved to 58 from 54. Readings above 50 mean more homebuilders report good market conditions.

The housing market may not be as strong as the data suggest because of severe reporting problems, contends John Williams, founder of He says the problems stem from the government shutdown in October, coupled with distortions from Hurricane Sandy in the Northeast last year and unusually cold weather this year.

2014 Housing Outlook

U.S. home prices will climb 5% in 2014 after gaining 10% this year, forecasts Bank of America Merrill Lynch. Prices have climbed 14% from their fourth-quarter 2011 trough. 2013 saw a rapid increase in home prices owing to record high affordability at the start of 2013, strong investor demand for distressed properties and very low inventory.

Home prices will increase at a slower rate over the next several years because of the increased difficulty for individual home buyers to get loans under new qualified mortgage standards that go into effect Jan. 10. At the same time, household formation rates have slowed to merely 500,000 this year -- down 42% from 857,000 in 2012.

Housing starts will rise another 20% in 2014 to 1.1 million, from 915,000 in this year, and return to its historical average rate of 1.5 million by 2016, BofA Merrill projects. They've rebounded tremendously from a low of 500,000 in early 2009.