Dropping Homebuilder Sentiment Is Providing Headwinds for This ETF

Rising inflation and normalizing home prices are already putting a damper on the real estate market. To add to that, homebuilder sentiment is on the way down, providing headwinds for homebuilding exchange traded funds. Take the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL), for example.

The fund is down about 28% for the year as rates continue to rise due to a U.S. Federal Reserve focused on tightening monetary policy. Given the current state of the real estate market, the sentiments of homebuilders are reflecting the sign of the times.

“The National Association of Home Builders (NAHB) takes the temperature of home builders’ sentiment on a monthly basis,” Forbes explained, noting a continuous drop in sentiment month after month. “In the latest report, home builder sentiment dropped again. The confidence was reflected at 38 in October, which means it’s at half the level it was 6 months ago.”

It’s been a persisting trend after real estate skyrocketed at the start of the COVID-19 pandemic in 2020. Rising mortgage rates and increased supply have been tempering home prices as of late as the Fed continues to go head to head with inflation.

“That represents 10 consecutive months of dropping home builder sentiment,” Forbes added. “With the exception of the uncertain times of spring 2020, this confidence reading is the lowest it has been since August 2012.”

That said, traders will want to keep a close eye on NAIL. If it falls enough to an area of value, it could be a prime opportunity to play a bounce.

As for the fund, NAIL seeks daily investment results of 300% of the daily performance of the Dow Jones U.S. Select Home Construction Index. The index measures U.S. companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers, and suppliers of building materials, furnishings, and fixtures.^SPHSI Chart

A Bearish Alternative

Looking to play more weakness ahead in the real estate market? If so, the Direxion Daily MSCI Real Est Bear 3X ETF (DRV) may be worth a look — it’s up over 50% for the year.

DRV seeks daily investment results equal to 300% of the inverse of the daily performance of the MSCI US REIT Index, which is a free float-adjusted market capitalization-weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index. DRV invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index.DRV Chart

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