ETF Trends
ETF Trends

The SPDR S&P Homebuilders ETF (NYSEArca: XHB) gained 0.7% and the iShares U.S. Home Construction ETF (NYSEArca: ITB) were solid performers in 2015, but the ability of the two largest homebuilders exchange traded funds to hold near-term momentum could be challenged on a technical basis.

Looking ahead, with the Federal Reserve starting to normalize interest rates, albeit at a gradual pace, more Americans may take the signal as a sign to look for cheap financing while they still can. For instance, according to the Mortgage Bankers Association, mortgage applications increased 7.3% last week from the prior week, refinance applications rose 11% and purchase applications was 4% higher, reports Stephanie Dhue for CNBC.

“In the stock market, the Dow Jones Home Construction index, which tracks a basket of home builder stocks, fell nearly 12% last week. It left no doubt that both the trading range in effect since last summer and the rising trend from October were broken to the downside,” reports Michael Kahn for Barron’s.

ITB tracks the Dow Jones Home Construction Index. However, the charts may be telling a story of vulnerability for funds such as ITB and 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]

“The sector as a whole is now somewhat oversold suggesting that bottom fishers could get active. Technical indicators tracking momentum in the daily time frame agree although in the big picture they suggest there is more downside ahead,” according to Barron’s.

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. Conversely, ITB is more of direct play on dedicated hombeuilders stocks.

Traders looking for a bearish play on homebuilders stocks can consider the Direxion Daily Homebuilders & Supplies 3x Bear Shares (NYSEArca: CLAW), which attempts to deliver triple the daily performance of the index XHB tracks. CLAW debuted last year.

iShares U.S. Home Construction 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.