The housing sector is highly cyclical and sensitive to economic and credit conditions. Homebuilding ETFs have rallied nicely in the last year, up more than 100% since the market’s March 9 low. That doesn’t mean, however, that they’re done struggling. It might continue to be a year of fits and starts for the sector as unemployment stays high and homeowners foreclose, but you can use ETFs to diversify and mitigate risk while you wait for that firm recovery. [How to Follow the Trends.]

Asset allocators might note that over the past three years SPDR S&P Homebuilders (NYSEArca: XHB) and iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB) have displayed 56% and 64% correlation to the S&P 500, reports John Gabriel for Morningstar. [Why Homebuilders Are Surging Ahead.]

For more stories about homebuilders, visit our homebuilders category.

• SPDR S&P Homebuilders (NYSEArca: XHB): Here, only about 35% of the fund’s assets (or eight out of the 26 holdings) are invested in homebuilders. The fund also invests in other sub-industries such as building products, home furnishings, home-improvement retail, and home-furnishing retail. This is an equal-weighted market cap index.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB): Only half of the fund’s constituents are actual homebuilders, but these companies account for about 70% of the portfolio. This is a market cap-weighted index that caps non-homebuilder related companies at 40%. [Big Improvements, Big Challenges In Real Estate.]

At the very least, real estate’s comeback from the lows is impressive. Investors had priced in total financial ruin that never materialized. But now the market may have gone too far in the other direction; there are concerns that it has “overshot” and calls for a strong recovery are way too hopeful at this point. Worse yet, if a double-dip recession strikes, real estate stocks could be among the hardest-hit, says John Spence for MarketWatch. [Homebuilder ETFs Quietly Surge.]

Market watchers are in particular wondering if commercial real estate is the other shoe about to drop. Fundamentally, the sector is facing declining rents, occupancies and property values, which is in its favor. Add a weak economy, high unemployment and the possible rise of interest rates, and it’s no wonder the outlook is so bleak.

REIT funds may be able to tap into raising equity and debt and the strongest companies may be able to get salvation from investors who have deep pockets, benefiting them once the economy solidly recovers. [Real Estate ETFs: Trouble Ahead?]

It’s impossible to say who’s right here. Fundamentally, a case has been made for continued weakness; on the other hand, the real estate sector could surprise us. If you’re waiting for an opportunity, a simple strategy we use is following the 200-day moving average to determine entry and exit. [How to Follow Trends.]

For more stories about real estate, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)

• SPDR S&P Homebuilders ETF (NYSEArca: XHB)

• Vanguard REIT ETF (NYSEArca: VNQ)

• SPDR Dow Jones REIT ETF (NYSEArca: RWR)

If you were wondering about that real estate recovery, you may have to keep doing that: pending home sales took a surprise downturn in January, sinking 7.6%. Much of the blame is being placed on those massive snowstorms back East, which had people thinking about heating their homes and securing provisions like bread and milk, instead of buying new homes. iShares Dow Jones U.S. Home Construction (NYSEArca: ITB) is down about 1% this morning; ITB has a mix of homebuilders and retail stores that benefit when the housing market is strong. [Homebuilders Surging Ahead.]

The Snowpocalypse didn’t keep shoppers from the stores last month. Retailers selling luxury goods and discount wares alike reported strong earnings, and 82%beat expectations. But the industry can’t rest on its laurels just yet; March is a longer month and will feature Easter-related spending, so the numbers will be eyed closely. SPDR S&P Retail (NYSEArca: XRT) is up more than 1.5% this morning. [5 ETFs for the New Retail Climate.]

Have you been feeling like you’re doing ever more at work? Then you’re not alone. Worker productivity surged 6.9% in the fourth quarter as companies squeeze more out of their reduced staffing levels. The jump was the biggest gain in a single year since 2002. Labor costs also declined by 5.9% for the quarter and 1.7% for the year – good news for employers, but not great for consumers.

First-time filings for unemployment benefits retreated from three-month highs this week, and the four-week average also retreated. Businesses are still a little reluctant to hire, but at the very least, layoffs have slowed. How long the recovery in the jobs market will take is another question entirely. Watchers believe that growth will be tepid and spotty, at best.

The Bank of England today followed the lead of the Federal Reserve and kept its own interest rates at record lows of 0.5%, making it the 12th straight month it has done so. Numbers show that the economy is growing faster than thought, but like many other developed nations, that growth has been full of stumbling blocks and hiccups. iShares MSCI United Kingdom (NYSEArca: EWU) is down about 0.6% so far today. [More on Europe.]

While it hasn’t been a smooth upward trajectory, iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB) is now touting a year-to-date return of 7.3% and SPDR S&P Homebuilders (NYSEArca: XHB) is up 5.3% this year. Earnings season has been kind to homebuilder stocks, thanks to reports from companies like Lennar Corp (NYSE: LEN), which finally notched profits after two years of losses, says John Spence for The Wall Street Journal. [Real Estate: A Sector on the Mend?]

Just because these funds have been standouts doesn’t mean that they will continue to be. After all, the U.S. housing market is still in a shambles and the recovery could continue to see its fair share of ups and downs in the forms of foreclosures, the winding down of tax breaks and the worst job market in years.  [Why the Sector Has Growing Room.]

To find those areas trending up, a simple strategy we suggest is the 200-day moving average; getting in when a fund crosses the line will ensure you’re there in time for any potential long-term uptrend, while having a stop loss will help you put a cap on your losses. Read more about trend following in The ETF Trend Following Playbook.

For more stories about homebuilders, visit our homebuilders category.

• SPDR S&P Homebuilders (NYSEArca: XHB)

• iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB)

Today’s fourth-quarter GDP numbers indicating 5.9% growth in the economy are a slight improvement over the previous 5.7% reported. But don’t get too comfortable with that. Economists expect that the numbers for this quarter will ultimately be much slower, judging by other numbers that have emerged in recent days.

January sales of previously occupied homes declined 7.2%, surprising economists, who expected a slight increase. These numbers are hot on the heels of Tuesday’s report on new home sales, which plummeted a whopping 11% in January. The numbers are being taken as a signal that tax credits may ultimately not be enough. iShares Dow Jones U.S. Home Construction (NYSEArca: ITB) is flat this mornig; in addition to owning homebuilders, the fund also holds retail stores that benefit when Americans purchase or upgrade homes. [Real Estate ETFs: On the Mend, or Trouble Ahead?]

Americans are becoming increasingly frustrated at the lack of growth in the job market, so it’s no surprise that consumer sentiment dove this month. At least outright panic over layoffs has abated, but lasting confidence may not come until a jobs stimulus package comes down and growth returns. [5 ETFs to Play the New Retail Climate.]

Business activity is picking up the pace, rising more than expected this month to the fastest pace in nearly five years. The barometer is perched at 62.6; any reading above 50 signals expansion.

Things seem to be improving at AIG (NYSE: AIG): the nation’s largest insurer reported an $8.9 billion loss. It sounds bad, until you recall that it’s an improvement over last year’s $62 billion quarterly loss a year earlier. PowerShares Dynamic Insurance (NYSEArca: PIC) is flat this morning. [Why Banks May Be the Next Big Movers.]

European Union officials, the International Monetary Fund (IMF) and the European Central Bank have all been in Greece this week to examine the country’s efforts at slashing its deficit. The goal? Slash the massive budget deficit by 4% this year. If Greece doesn’t come up with a plan, the euro could continue to suffer and financial uncertainty and fear about the region could have a worldwide contagion effect. CurrencyShares Euro Trust (NYSEArca: FXE) is up nearly 1% this morning.

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.

Every investor is thinking about interest rates these days. They’ve been at record lows for so long that they’re bound to come back again soon, right? Bernanke told Congress this morning that it isn’t the case: interest rates will remain low for an “extended period,” in fact. He’s said it before, though: on Jan. 27 and on Feb. 10. Will investors finally buy it? The SPDRs (NYSEArca: SPY) are up nearly 1% this morning.

Dramatic testimony on Toyota (NYSE: TM) continues today. Akio Toyoda, the company’s elusive leader, is finally going to appear before the House Committee on Oversight and Government Reform to read a prepared statement. In the statement, he plans to accept full responsibility and assure lawmakers that the automaker is working to fix the problems that have been a public relations nightmare for the company.

New home sales took an unexpected 11% spill last month, dropping to the lowest level on record. It’s being taken as a signal that government tax credits may not be enough to revive the ailing sector. Homebuilders are in a tough environment these days: not only are home sales tanking, but they’re competing with foreclosure properties. iShares Dow Jones U.S. Home Construction (NYSEArca: ITB) is down nearly 1% this morning. [Real Estate ETFs: On the Mend?]

Greece received a warning today that Standard & Poor’s may downgrade the already-struggling nation by a notch or two in the coming weeks. Such a downgrade would put the country’s debt near junk territory. If Greece continues to struggle, it could further sink the euro, which has already suffered amid the crisis. CurrencyShares Euro Trust (NYSEArca: FXE) is up slightly this morning. [Spain, Greece, Portugal: Hope in Sight?]

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.

Some analysts say that the real estate investment trust (REIT) and the broader real estate sector improvements primarily owe to stronger-than-expected earnings that many real estate companies have reported this season. Sara Nunnally for Taipan’s Tipping Point says foreclosures and housing prices are falling, while new home orders are on the rise. Homebuilder confidence is even up (though still far below the norm) and homebuilding activity improved 2.8% last month.

But does that mean we’re out of the woods? Few seem to think so.

Shashien Nasiripour for The Huffington Post reports that more commercial real estate fallout may be just around the corner. Over the next five years, about $1.4 trillion in commercial real estate loans will reach the end of their terms and require new financing. Nearly half are “underwater,” meaning the borrower owes more than the property is worth. Commercial property values have fallen 40%. [Has Real Estate Hit Bottom?]

Congressional Oversight Panel Head Elizabeth Warren warned that the panel was concerned that if the Treasury didn’t take action to address the problems that loom, the impact could spark another devastating round in the financial crisis. [The Future of Commercial Real Estate ETFs.]

For more stories about REITs, visit our REITs category.

• Vanguard REIT Vipers (NYSEArca: VNQ)

• SPDR Dow Jones REIT (NYSEArca: RWR)

• iShares FTSE NAREIT Industrial/Office Complex (NYSEArca: FIO)

• First Trust S&P REIT Index (NYSEArca: FRI)

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)

• Many homebuilders are reporting “less bad” numbers for the fourth quarters, with write-downs and order cancellations declining and improving order rates, Matt Phillips for The Wall Street Journal reports.
• Lumber future prices are up 23.2% since the end of last year. [Homebuilders Have Room to Grow.]
• Homebuilders received a nice amount of cash from the government’s stimulus programs and tax cuts. Congress extended the net operating loss carryback from two to five years, says Stephen Rosenman for Seeking Alpha. That means homebuilders can recover taxes paid in earlier years, when they may have been more profitable.

The housing market is still seeing signs of distress: jumbo mortgage loans are defaulting and people are walking away from their homes. Stephen Roseman for Seeking Alpha reports that it should be clear that builders have made progress digging themselves out of the 2007- 2009 housing crisis.

Are the fourth-quarter numbers the result of tax breaks or a sign of true stabilization in the homebuilding sector? Only time will truly tell.

For more stories about homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB)

• SPDR S&P Homebuilders (NYSEArca: XHB)

The number of Americans who own their home is at 67.3%, the lowest point in more than 10 years. The sector at large has shown signs that a stabilization or recovery may be in the works and with numbers at those lows, there’s room to grow, say Sarah Murphy and Jeff Bater for The Wall Street Journal.

• The home-ownership rate reached a high of 69% in 2004 as low interest rates and easy credit prompted large numbers of families to stop renting and purchase homes. The rate began to fall two years later as some homeowners struggled to make their mortgage payments and eventually lost their homes to foreclosure. Between 2007 to 2009, nearly four million homes were lost to foreclosure. And home ownership rates are now moving closer to the level that was common in the 1990s.
• One trend we’re noticing is that as Americans are buying new homes, they’re going smaller. Gone are the indistinguishable McMansions that dot sprawling new subdivisions – today, if it can be done smaller and more affordably, then homebuilders believe they will come.
• We may not be done with foreclosures. Unemployment is still at highs not seen in more than two decades, which means that more homeowners could still walk away from their homes.
• D.R. Horton Inc. (NYSE: DHI)  the second-largest U.S. homebuilder by revenue, reported its first quarterly profit since 2007 as sales rose and the company booked a tax benefit. [Plays  for a Brighter Homebuilding Future.]
• Lennar (NYSE: LEN), a Miami-based homebuilder, earned $36 million for the fourth quarter ended in November. Their shares shot up 8% to their highest levels since last October. Colin Barr for Fortune reports that the real driver of Lennar’s rebound, as the company acknowledged Thursday, was a $353 million tax gain that stems from a bit of congressional largesse in November.

For more stores about homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB)

• SPDR S&P Homebuilders (NYSEArca: XHB)

Bank of America (NYSE: BAC) was the most disappointing, reporting a $5.2 billion loss during the fourth quarter. The bank said the losses were the result of both consumers struggling to repay credit cards and mortgages, as well as it’s own repayment of the TARP bailout money. A year earlier, the bank lost $2.4 billion, says Ieva M. Augstums for the Associated Press. [12 plays for 10 surprises.]

Other earnings include:

• Wells Fargo (NYSE: WFC) was a standout, reporting a quarterly profit of $3 billion. The bank raised $12 billion selling new shares in December in order to repay the $25 billion TARP loan, reports Alistair Barr for MarketWatch.
• Morgan Stanley (NYSE: MS) showed that it’s still struggling to recover, saying that a decline in trading revenue sent fourth quarter profits down to $617 million. The results were short of analysts’ projections, says Joe Bel Bruno for The Wall Street Journal.

The Financial Select Sector SPDR (NYSEArca: XLF) is down about 1% this morning; Bank of America is 9.4%; Morgan Stanley is 3.3%; Wells Fargo is 9.6%.

Health care ETFs are down today, despite a stunning victory for Republicans in Massachusetts. Scott Brown won the race against Democrat Martha Coakley 52% to 47%, costing Democrats their 60-vote majority, report Greg Hitt and Peter Wallsten for The Wall Street Journal. Brown has been an opponent of health care legislation, and many fear it’s a death knell for the effort. Vanguard Health Care (NYSEArca: VHT) is down more than 1% this morning. [The case for investing in health care.]

Home construction declined a sharp 4% in December. Economists blamed the decline primarily in cold and wet weather in many areas of the country. The true bright spot is building permits, which rose 10.9% last month, which is the highest level in a year, reports Javier C. Hernandez for The New York Times. iShares Dow Jones U.S. Home Construction (NYSEArca: ITB) is down nearly 2% this morning. [Commercial real estate at the bottom?]

Producer prices rose slightly by 0.2% last month based primarily on food prices, which saw their largest year-on-year gain since October 2008.