Some initial June gloom might give way to sunshine for homebuilders for the rest of the summer (or not). While nobody has a crystal ball to accurately determine what will happen, the homebuilding sector will be an interesting watch this summer. This could put the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) and other ETFs in play.
The obvious sign of potential bullishness is rate cuts, but they might not come soon enough during the summer months. Summer is typically the time for the real estate market to heat up, but with higher-for-longer inflation keeping rates elevated, that might keep prospective real estate buyers on the sidelines. In turn, a tepid real estate market doesn’t give homebuilders the motivation to do what they do best: build homes.
That could all change on a dime, of course, if the Fed decides to pivot from keeping rates steady. Fed officials are already calling for rates to come as soon as July. But until that happens, it’s simply rhetoric for now.
Homebuilders’ Dog Days of Summer
Given the challenging macro environment for homebuilders, the S&P 500 Homebuilding Index has been a downward-sloping chart so far this year. Downward slopes are fine for skiers in the winter, but as mentioned, during summer when the real estate market typically heats up, it’s not a positive sign.
In turn, the largest homebuilders are also exhibiting similar chart behaviors. In the U.S., DR Horton, Lennar Corp, and PulteGroup round out the top three largest domestic homebuilders. Looking at their year-to-date performances, they compare similarly to the broader S&P index with each company obviously seeing variances in performance.
To traders, the strategy might seem simple: Ride the bearish trend until the wheels fall off. However, as mentioned, any positive news could reverse the trend at any time. The month of May, for example, saw an unexpected bump in the housing market.
A Not-So-Cruel Summer?
Though the housing market is still moving at relatively sluggish pace, May offered up some encouraging signs. If rates come down, that might help nudge the market a bit. But it would have to be substantial cuts to make a tangible impact. Nonetheless, any positive news is a plus for real estate right now. It could mean the summer won’t be so cruel for real estate market participants.
According to data from the National Association of Realtors (NAR), existing home sales rose 0.8% in May. Compared to a year ago when sales were down 0.7%, it’s a marked improvement.
A strong real estate market is also good for the overall economic snapshot for the U.S. May’s news about existing home sales could reaffirm confidence in the economy, which is needed now in times of uncertainty.
“There exists a strong correlation between purchases of existing homes and consumer spending,” wrote VettaFi economic and market research analyst Jennifer Nash. “An increase in existing home sales can indirectly stimulate economic activity with increased consumer spending on new furnishings and appliances. Alternatively, a sustained drop in existing home sales often foreshadows a downturn in the economy.”
Again, the ultimate catalyst for real estate hinges on interest rates. Will rate cuts actually come, and will they be enough this year to jump-start the homebuilding sector? Gone are the days of 2021, when mortgage rates hit a low of 2.65% for a 30-year fixed product. That was less than half of the going rate now.
“Even though new home sales showed growth last month, the homebuilders—both big and small—have no desire to grow housing permits or starts with 7% mortgage rates,” Housing Wire explained. “Housing starts and permits peaked in 2022 and have been fluctuating at levels similar to the early stages of the COVID-19 recession for some time now. The housing construction cycle reached its peak in 2022, unless mortgage rates decrease.”
This brings to mind a few other potential ETFs to play from Direxion Investments in addition to NAIL.
2 More Trades
Traders who want to specifically target the homebuilding sector specifically should opt for the aforementioned NAIL. As homebuilding sentiment shifts, especially for the better, NAIL is the trade to pursue. The fund provides 3x exposure to the Dow Jones U.S. Select Home Construction Index. It allows traders to maximize their profitability if their bullish conviction is correct.
Another play is a broader take on the real estate market. For that, consider using the Direxion Daily Real Estate Bull 3X Shares (DRN). It also makes use of 3X exposure, but tracks the Real Estate Select Sector Index (IXRETR). The index includes companies involved in real estate management, real estate development, and real estate investment trusts (REITs), excluding mortgage REITs. It’s an ideal play for traders wanting to trade the whole sector as opposed to taking on higher concentration risk via exposure to individual companies through their shares.
If the bearish trend of the past 12 months continues, the Direxion Daily Real Estate Bear 3X Shares (DRV) is the move to make. The fund allows traders to benefit from the real estate market’s doldrums as a single trade or as a hedging component to offset any bullish positions like DRN.
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