Thanks to the taper, concerns have begun to build over the homebuilders market. This key segment of the economy was doing quite well, but with the prospect of higher rates, many are worried that demand for housing will slow down.
After all, higher interest rates push up mortgage rates too, and with added costs, many can’t afford the same level of house that they once could. This has led many to wait on buying new homes, or reconsider a housing purchase at this time.
This concern was really starting to hit homebuilder stocks which were underperforming broad markets over the past month. However, thanks to some solid data on Tuesday, the space is starting to look a bit more promising, even with the taper worries (see Best ETF Strategies for 2014).
Earnings in Focus
A key reason for strength in the homebuilding sector was the solid earnings report from DR Horton (DHI - Free Report) . The firm reported adjusted earnings of 36 cents a share, beating out the Zacks Consensus Estimate of 30 cents a share. Furthermore, earnings grew 80% year-over-year, as margins expanded and the number of homes closed increased.
Home sales figures were especially robust for the company, as this number increased by 33.6% year-over-year. This news helped to boost DHI more than 10% on the day, and it also increased sentiment about the space and that solid earnings were on the way for the rest of the sector (see the Guide to Housing ETFs).
Beyond this good earnings report, investors also saw some great news from the all-important 20-city Case-Shiller index. This key home price benchmark rose 13.7% in November (year-over-year), the best performance since early 2006, suggesting that it will another solid time for the housing sector. And although prices dipped when compared to the previous month, many investors didn’t put much weight into this as this typically happens as we approach the winter months.
Due to these factors, ETFs tracking the homebuilding industry performed quite well in Tuesday trading. Both the funds tracking this space easily finished ahead of the market’s performance for the session, and both had elevated volume levels too.
The SPDR S&P Homebuilders ETF (XHB - Free Report) gained about 1.9% on the session, beating out the market’s performance for the day by a factor of three. The product holds about three dozen securities in its basket, and allocates one of its top three holdings to DHI (see Is XHB a Better Housing ETF Play?).
However, investors should note that XHB isn’t a pure play on the homebuilders, as it allocates a pretty good chunk to firms in the household appliances and specialty retail segments. For more of a pure play, investors have the iShares U.S. Home Construction ETF (ITB - Free Report) to focus on instead.
This fund allocates nearly two-thirds of its portfolios to builders, leaving the rest to companies that make materials and other related services and products. Since it is more focused on builders, it was the bigger winner in Tuesday trading as it allocates nearly 10% of its portfolio to DHI pushing it to a 3.7% gain for the day.
DHI, a pretty important homebuilder, gave investors very solid earnings. This helped to push the stock up by over 10% on the session, and it raised investor confidence regarding the sector’s near term outlook (also read Timber ETFs: The Best Housing Recovery Plays?).
This bullishness was further confirmed by the Case Shiller reading, which showed strong gains in the broad 20-city index for the most recent data available. With such solid figures in this home price benchmark, along with great earnings, there is at least some hope that this sector, and the homebuilder ETFs, can surprise once again this year, and be star performers even with the threat of the taper.
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