Mortgage rates are on the decline as safe-haven and overseas demand push down U.S. bond yields, potentially enticing new homeowners and reinforcing home construction-related exchange traded funds.
Homebuilder exchange traded funds were among the best performing areas Wednesday as the equities market rebounded, with the SPDR S&P Homebuilders ETF (NYSEArca: XHB) up 2.9% and the iShares U.S. Home Construction ETF (NYSEArca: ITB) 3.7% higher. Over the past three months, XBH increased 11.8% while ITB gained 10.3%.
Boosting the outlook for the homebuilders industry, low mortgage rates could bring back consumers who have stuck to renting. The thirty-year fixed mortgage rater dipped to 3.58% Tuesday, their lowest in 19 months, reports Chris Dieterich for Barron’s.
Technical analysts are also pointing out that the relative strength of ITB compared to the S&P 500 is at its highest level since April 2014 and that homebuilders have been recently outperforming the broader index.
“Technically speaking, ITB vs SPX, has moved to the highest levels since last Spring,” Mark Newton, chief technical analyst at Greywolf Execution Partners, said in the Barron’s article. “This move to monthly highs in relative terms is bullish for the Builders and should allow for further progress in the weeks and months ahead.”
Additionally, the week chart of the Philly Housing Sector Index (HGX) compared to the S&P 500 also reveals an emerging relative strength leader, with a head & shoulder reversal, which could indicate that the sector is about to break out from a downtrend, according to Captain John.
Specifically, the weekly relative strength chart of HGX versus the S&P 500 shows a downtrend dating back to late 2012. However, the chart is forming an inverse head and shoulder with the head at the mid-October low – the bullish technical indicator predicts a reversal of a prolonged downtrend.
Looking at the fundamental factors, market observers argue that the improved construction prospects, a better labor market and lower borrowing costs could all support the homebuilder industry.
The following chart depicts the relative strength of iShares U.S. Home Construction ETF versus the S&P 500 on a weekly basis.
For more information on the housing sector, visit our homebuilders category.
Max Chen contributed to this article.
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.