There have been times this year when 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, looked promising.
However, much of that promise has recently washed away as ITB has tumbled more than 6% over the past month and the ETF is now flirting with some key technical levels on the downside. 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 environment.
SEE MORE: Homebuilder ETFs Jump on Improving Outlook
A looming rate hike by the Federal Reserve, which could arrive in December, could be one reason homebuilder stocks and ETFs are under pressure.
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.
“Early July, ITB ($25.39) broke out of that range, rallying to $29.97 later that month. Turns out it was a false breakout. In the subsequent sell-off, it lost both 50- and 200-day moving averages,” according to Hedgopia. “So far this week, the ETF is down 4.3 percent, and yesterday lost the afore-mentioned support. Daily and weekly conditions are grossly oversold. A bounce is due, but it needs to stabilize first. Too soon to say if it is a false breakdown, but worth watching.”
[related_stories]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. Still, some market observers are worried that the rising mortgage rates could dissuade borrowers to move into new homes.
SEE MORE: Hone in on Homebuilders ETFs
“The median price of an existing and new home reached new highs in June this year – respectively at $247,600 and $321,600. As of September, prices are down 5.7 percent and 2.6 percent respectively from those highs,” notes Hedgopia. “Prices have managed to rise to fresh records, but not sales.
In September, sales of existing and new homes rose 3.2 percent and 3.1 percent m/m to a seasonally adjusted annual rate of 593,000 and 5.47 million. They were both down from recent cycle highs – 629,000 in July this year and 5.57 million in June, in that order.”
For more information on the housing market, visit our homebuilders category.
iShares U.S. Home Construction ETF
