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Homebuilders ETFs Continue to Rally

ITB XHB

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The U.S. economy recently posted solid gains in the number of jobs for the month of February. The Bureau of Labor Statistics (BLS) reported that the economy created 236,000 more jobs during the month.

This improvement surpasses the expectation of 160,000 new jobs. Also, the unemployment rate dropped to 7.7% from 7.9% in January, further signaling the solid trend in the jobs market (Impact of Positive Jobs Data on ETFs).

After posting a solid increase in job creation in the month of February, the economy yet again showed evidence that it is gaining momentum. Strong gains in the housing starts for the month of February bears testimony to the fact that the economy is moving on the path of recovery and five years of downturn in the U.S. housing market has ended.

Housing starts rose by of 0.8% to 917,000 units in February 2013, after an 8.5% fall in January to 890,000 units.

The increase was mostly led by number of starts in single-family units which hit the highest level since June 2008. The multi-family unit category, which was mostly responsible for the drop in housing start numbers in January, surged to a 285,000 annualized rate this month. However, the number still remains below 347,000 recorded in December (Homebuilder ETFs: Can the Rally Continue?).

Another encouraging factor in the month of February was that the number of housing permits posted was the highest since June 2008, climbing 4.6% to 946,000 units during the month.

In fact, home prices are also rising as the supply for available homes still remains low, leading to a 10% rise in prices of homes in January. This is the highest increase in price recorded in seven years, and could lead to more interest in real estate going forward.

It also appears that mortgage interest rates, hovering near record lows, along with somewhat higher rentals have turned the tide for the sector, thereby making homes more affordable. Also, a higher employment level and rising consumer confidence in the market have undoubtedly made the path to recovery smoother for the sector (Best Construction ETF to Ride the Housing Upswing?).

It also hasn’t hurt that the broad market has been doing quite well. Besides some recent European woes, stocks have moved higher overall and many are looking for solid returns in the upcoming earnings season as well (3 Foreign ETFs Still Beating the S&P 500).

ETFs in the News

This broad market trend higher and the continued positive data in the space could be great news for the homebuilder ETFs going forward. We generally agree with this assessment, which is why both of the ETFs in the space are currently ranked as ‘Buys’.

However, there are a number of key differences between the two products which investors should be aware of before delving further into this still-surging space:

The iShares DJ US Home Construction (ITB - ETF report) offers a pure play into the homebuilding sector as evidenced by its allocation of 64.56% of its asset base of $2.3 billion to home construction companies. Other sectors that it invests in are building materials, home improvement and furnishings (Two Sector ETFs to Buy in 2013).

The fund offers exposure to 29 companies, with established homebuilders like Pulte Group, Lennar Corp and DR Horton Inc. making up the top line of the fund.

Meanwhile, the SPDR S&P Homebuilders ETF (XHB - ETF report) is somewhat larger and a more liquid option to play in the sector. Although this fund may not be the right choice for those seeking to truly target the builders of real estate.

XHB has just 28.79% of its asset base of $2.7 billion in homebuilding, while the rest is spread across building products, home furnishing retail, home improvement retail and household appliances (Is XHB a Better Housing ETF Play?).

However, related sectors have also reaped the benefits from the resurgence in housing as exemplified by XHB’s performance in 2012.

The housing sector should turn out to be the primary driver of economic growth in 2013. For seven straight quarters, spending on home construction and home improvement activity had a positive contribution to the economic growth.

However, the fact cannot be denied that much is left to be done for housing starts to reach historic levels, so one has to believe that more gains could be had in this space going forward. This could be especially true if data continues to be positive, and if the all important earnings season lives up to expectations.

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