Fed Policy Keeps Housing ETFs Rising

October 29, 2013

But data sets are pointing south for the sector.

In the past year, homebuilders and related ETFs have benefited from the unprecedented easy-money policy of the Federal Reserve. But with the Fed’s tapering set to go into effect in 2014, some of those double-digit returns may be pared down to single digits or lower.

Year-to-date returns for homebuilding ETFs, a segment with total assets of $3.81 billion, remain solid, after they topped the best-performers’ list in 2012. The housing market is likely to keep performing strongly, though the rate of growth is definitely slowing amid rising borrowing rates and continued difficulty in obtaining home loans for some aspiring home buyers.

According to the S&P/Case-Shiller1 Home Price Indices, the 10-City and 20-City Composites increased 12.8 percent year-over-year through August. Compared to July 2013, the annual growth rates accelerated for both Composites and 14 cities.

The $2.1 billion SPDR S&P Homebuilders ETF (XHB | A-26) has returned 17.79 percent, the $1.8 billion iShares U.S. Home Construction ETF (ITB | A-57) is up 9.66 percent and the $95.6 million PowerShares Dynamic Building & Construction Sector Portfolio ETF (PKB | C-40) has gained 22.04 percent so far this year.

The S&P 500 Index, by comparison, has returned 23.64 percent year-to-date.

XHB and ITB have the majority of their exposure to more homebuilding stocks—26.97 percent and 60.94 percent, respectively. But XHB has a decidedly retail bent focusing on names such as Home Depot, Lowe’s and Beds, Bath & Beyond.

PKB is the only ETF covering the construction & engineering sectors, which together make up 31.01 percent of its portfolio. The ETF’s portfolio include Mohawk Industries, a flooring manufacturer, and Vulcan Materials Company, a producer of construction materials.


Chart courtesy of StockCharts.com

Sales of new single-family houses in August were at 421,000, which is 7.9 percent above the July rate of 390,000 and 12.6 percent above the August 2012 estimate of 374,000, according to data from the U.S. Census Bureau and the Department of Housing and Urban Development.

September figures for new-home sales were delayed due to the partial federal government shutdown; they will be released on Oct. 29.



Recovery Slowdown

However, the future remains uncertain for the housing recovery. After hitting their highest level in almost four years, existing-home sales declined in September, according to the National Association of Realtors.

Specifically, total existing-home sales, which include single-family homes, townhomes, condominiums and co-ops, declined 1.9 percent to 5.29 million. These figures are still 10.7 percent above the 4.78 million-unit pace in September 2012.

The NAR also reported that pending home sales declined for the fourth-consecutive month in September, as higher mortgage interest rates and higher home prices curbed buying power.

NAR’s Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 5.6 percent to 101.6 in September from a downwardly revised 107.6 in August, and is 1.2 percent below September 2012, when it was 102.8.

The index is at the lowest level since December 2012, when it was 101.3.

Also, according to Freddie Mac, the national average rate for a 30-year, conventional, fixed-rate mortgage rose to 4.49 percent in September from 4.46 percent in August, and is the highest since July 2011, when it was 4.55 percent; the rate was 3.47 percent in September 2012.

Walter Molony, a spokesman for the NAR, said the association expects the upward trend of rising mortgage rates and home prices to continue long term.

“The main friction to the market is the unnecessarily restrictive mortgage underwriting standard coupled with limited inventory in many areas,” he said.

“We’re seeing the sales of volume come down a bit in the fourth quarter and then leveling out in 2014. For this year, we’re going to see a nice increase in sales in the range of 11-12 percent but going into 2014, we’re looking at sales to just flat-line,” Molony noted.

Molony added that NAR is projecting the 30-year fixed mortgage rate to trend upward going from an average of 4.2 percent this year to 5.3 percent in 2014.


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