The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest exchange traded funds tracking homebuilders stocks, have not been much to boast about lately with ITB rising only modestly over the past month and XHB notching a small loss over the same period.
The index of builder confidence hovered above 60 in July and June, and it has remained positive for the past year. The positive reading is adds to a number of promising indicators in recent months. For instance, the National Association of Realtors said sales of existing homes in June surged to their highest since February 2007. [Home Sales Hit Eight-Year High, Boost Homebuilders ETFs]
However, the charts may be telling a story of vulnerability for funds such as XHB. Some market observers are worried that the rising mortgage rates could dissuade borrowers to move into new homes.
In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home. [Factors That Are Holding Back Housing, Homebuilder ETFs]
On the other hand, housing industry experts also argue that higher rates reflect an improving economy and wage growth, which could also help the housing market in the long run. Making matters more concerning for XHB is that the ETF recently violated its 200-day moving average.
“In technical analysis, a price trading below its 200-day moving average typically is used to suggest that the long-term momentum is on the side of the bears. Furthermore, traders will watch for the moment where the 50-day moving average (blue line) crosses below the 200-day moving average (red line). This bearish crossover (shown by the red circle) is a very common sell signal and is known as the death cross. This crossover traditionally marks the beginning of a long-term downtrend and many bearish traders will likely look to protect their positions by placing stop-loss orders above the 50-day and 200-day moving averages, which are currently trading at $35.89 and $36.19 respectively,” according to Investopedia.
The equal-weight XHB mixes stocks such as Tempur Sealy (NYSE: TPX), Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH) with pure play homebuilders such as Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOLL) among others.
SPDR S&P Homebuilders ETF
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.