The housing sector is finally looking better. More new homebuyers are on the market and housing sales are up. The improved outlook may have set a solid framework for homebuilder-related exchange traded fund (ETF) plays.

Pointing to a rise in sales and affordable property, Moody’s Investor Service stated that the outlook for U.S. homebuilders improved to “stable,” a first in almost four years, report John Gittelsohn and John Detrixhe for BusinessWeek. Senior Housing analyst Joseph Snider says that “housing starts, new home sales and existing home sales are all showing positive trends.” [Improvements in new home construction.]

Fitch Ratings still maintains a “negative” outlook on 10 of 13 hombuilders, but the ratings firm has also declared an end to the four-year decline in the sector. Robert P. Curran, a homebuilding analyst with Fitch, warns that “challenges face the industry and individual companies.”

Homebuilders are offering smaller designs in response to higher demand from first-time buyers who have less money to spend, writes Stephanie Armour for USA Today. The median square footage of new homes decreased 9% from a peak of 2,300 square feet in 2006 to 2,100 square feet by September this year.

The new trend of smaller homes is likely to continue because move-up buyers have less equity and won’t be upgrading anytime soon. Nevertheless, the appetite for smaller homes may be a welcome change for home builders as new home sales have been challenged in the past few years. [Reasons to watch real estate.]