Homebuilder ETFs may be poised for a drop after storming ahead of the S&P 500 over the past year. Options traders are taking a cautious stance on the sector, pending home sales are down and the builder ETFs are facing key resistance levels that could derail the rally.
Despite the slight drop in pending home sales last month, homebuilder ETFs rebounded somewhat Thursday following a three-day slide from multiyear highs. Pending home sales are seen as one leading indicator for the housing market. [Builder ETF Highest Since 2007]
The National Association of Realtors said its Pending Home Sales Index for contracts signed in August declined 2.6% to 99.2, but it remained 10.7% higher year-over-year, Reuters reports. The reading in July was 101.9, the highest since April 2010.
“The performance in month-to-month contract signings has been uneven with ongoing shortages of lower priced inventory in much of the country,” the association’s chief economist, Lawrence Yun, said in the article.
Nevertheless, Yun expects overall home sales to be higher in 2012, compared to last year, with a 9% rise to 4.64 million units, reports Diana Olick for CNBC.
“Fixed mortgage rates continued to decline this week, largely due to the Federal Reserve’s purchases of mortgage securities, and should support an already improving housing market,” Frank Nothaft, vice president and chief economist, Freddie Mac, said in an NBC article.
As a result of the Fed’s quantitative easing measures, the 30-year loan rate dropped to a record low 3.40% and the 15-year fixed mortgage rate dipped to 2.73%.
Other housing analysts, though, caution that the housing recovery is being fueled by cash-flush investors and sales could drop in the end of the year due to bank delays and loan modifications.
The SPDR S&P Homebuilders (NYSEArca: XHB) is up 45.1% year-to-date and the iShares DJ U.S. Home Construction (NYSEArca: ITB) has gained 62.7% year-to-date.
Recently, some options traders have been buying put contracts on homebuilder ETFs, which means they’re hedging or speculating the sector will cool off after this year’s huge rally. ITB and XHB both pulled back about 4% over the past week. [Bears, Hedgers Buy Puts on Homebuilder Index ETF]
From a technical perspective, Kimble Charting Solutions notes the Dow Jones US Home Construction Index is dealing with rising channel resistance. Also, relative momentum is the highest since the housing bust, suggesting the builder ETFs may need to cool off a bit in the near term.
Some investors use homebuilder ETFs as one tool to monitor the health of the housing market, which is an important missing link in the economic recovery.
iShares DJ U.S. Home Construction
For more information on the home construction sector, visit our homebuilders category.
Max Chen contributed to this article.