The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest exchange traded funds focusing on homebuilders and related fare, are up an average of 3% this year.
Even with those tepid gains, some traders believe homebuilder equities could be vulnerable to some near-term downside. Mortgage rates may continue to rise as investors anticipate a faster economic expansion and inflation from President-elect Donald Trump’s policies. Not to mention plans by the Federal Reserve to raise interest rates several times next year could weigh on ETFs like ITB and XHB.
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.
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.
Conversely, 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.
“While the homebuilders have surged more than 9 percent since the election thanks, in part, to strong earnings and an improving economic outlook, the stocks have retreated in the past week and a half. But the troubles have been building for the last few years, according to Oppenheimer technician Ari Wald, who describes “mixed signals” in the charts of the home construction ETF ITB,” reports CNBC.
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.
“On the other hand, Harvest Volatility Management partner Dennis Davitt believes there’s still room to run for the homebuilders, especially given the industry outlook,” adds CNBC.
For more information on the housing sector, visit our homebuilders category.