SPDR S&P Homebuilders (NYSEArca: XHB) was down more than 1% in early trading Thursday following a report that U.S. housing starts fell more than expected last month.

The builder ETF was on a 10-day winning streak heading into Thursday’s action.

The Commerce Department said housing starts declined 16.5% in April to a five-month low.

“The housing sector has had a bit of a pause recently but the permits data suggests the momentum will resume,” said David Sloan, a senior economist at 4Cast Inc., in a Bloomberg News report.

The iShares U.S. Home Construction ETF (NYSEArca: ITB) was also off over 1% Thursday morning.

The homebuilder ETFs have been outperforming the S&P 500 the past month on signs the housing recovery is gaining momentum.

ITB is up about 23% year to date compared with a gain of 17% for the S&P 500.

The homebuilder ETFs also hold building-materials and fixtures producers, home-improvement retailers and furniture companies, notes Morningstar analyst Robert Goldsborough. [A Diversified Homebuilders ETF to Capture the Housing Recovery]

Investors should be prepared for a bumpy ride as ITB has been about twice as volatile as the S&P 500 over the past five years.

“The housing industry appears to have turned the corner. In the wake of a steady stream of positive reports, homebuilding companies’ share prices have been on a tear since the start of 2012,” Goldsborough writes in a report on the builder ETF.

“However, despite all this rosy data and mortgage rates remaining at record lows, there are some danger signs that could hamper homebuilders going forward, such as a huge inventory of foreclosed homes on the market at distressed prices,” he added. “Also, lending standards are much tighter than they were a few years ago. Given the still-lousy job market, high housing inventory, and a sea of foreclosures, it’s reasonable for an investor to wonder if homebuilding stocks have gotten ahead of themselves, given their recent rally.”

SPDR S&P Homebuilders


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