Fed Holds the Cards for Homebuilders ETFs

The Federal Reserve meets next week and there are plenty of corners of the markets that would like to see the central bank raise interest rates. Other sectors and industries would prefer the lower for longer policy. Put the SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest homebuilders exchange traded funds, in the second category.

Some traders see the data as supportive of more gains for ITB, XHB and the ETFs’ holdings. ITB and XHB both include exposure to home products and retailers, along with their large homebuilders allocations. However, supportive data for homebuilders could be challenged in a rising interest rate environment.

SEE MORE: Homebuilder ETFs Jump on Improving Outlook

The current low inventories has helped bolster property prices. The persistent low-rate environment has helped keep mortgage rates depressed and attract new home buyers. However, wage growth will be required to maintain a rising demand.

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.


“There are other technical factors that confirm this new bearish stance: The trend from the bottom of the rally in February has now broken to the downside, while momentum and volume indicators were already in decline, forecasting the danger,” reports Michael Kahn for Barron’s regarding ITB.