With a multiday rally last week, could home builders and the exchange traded funds (ETFs) that track the sector see the light at the end of the tunnel?
In an attempt to curb the faltering housing market, the Federal Reserve announced that they will buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE). Additionally, the Federal Home Loan Banks announced it will add an additional $500 billion in mortgage-backed securities to improve the ability to buy up residential mortgages from mortgage originators, giving them the incentive to lend more to prospective home buyers and lower interest rates, states the Wall Street Journal.
The reaction to these announcements was favorable to home builders. D.R. Lorton (DHI), Lennar (LEN), Toll Brothers (TOL) and Pulte Homes (PHM) all showed tremendous gains, some even adding as much as 60% to its value, but are still not close to the levels that they were once at.
It is still too early to say that the housing market has turned around, pouring money into the system and government intervention is just the beginning. The key factor for a recovery will be getting consumers to purchase homes. This may be tough with record high unemployment rates, which are expected to continue to grow, a significant decrease in buyer’s net wealth, courtesy of the stock market meltdown, a continuing trend in declining home values, and the overall uncertainty of the economy.
SPDR S&P Homebuilders (XHB): down 38.9% year-to-date; up 32.1% for the month
iShares Dow Jones U.S. Home Construction Index Fun (ITB): down 42.9% for the year; up 41.5% for the month
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.