Homebuilder ETFs should directly benefit from the Federal Reserve’s decision to step up its purchases of mortgage-backed securities in an effort to support the market for home loans and keep mortgage rates low.
However, hot-performing builder funds have lagged the S&P 500 in the wake of the Fed pulling the trigger on QE3.
“Homebuilders have been stunningly powerful following the October low of last year,” says Michael Gayed, chief investment strategist at Pension Partners.
SPDR S&P Homebuilders (NYSEArca: XHB) and iShares DJ U.S. Home Construction (NYSEArca: ITB) are up 88.9% and 117.3% over the past year, according to Morningstar. However, the sector may be poised to cool off.
“The Fed’s open ended purchasing of mortgage backed securities has sent 30 year fixed rates to another historic all time low, which one would think would cause homebuilders to continue leading markets. The problem is that homebuilders may be tired. It seems the group has discounted a lot of good news already, given the magnitude and duration of the move,” Gayed wrote at Seeking Alpha.