The housing slowdown that began in the second half of 2013 was aggravated by a harsh winter. This took a toll on the homebuilders in the December quarter, delaying construction and raising serious doubts as to the strength of the housing market (read: Has Spring finally Sprung for Housing ETFs?). The March quarter is also seeing mixed results from homebuilders. Many of the homebuilders to have reported thus far have seen declining order trends.
The weather has no doubt been a major spoilsport for the sector in the past two quarters. However, there are other pressing issues for the builders as well. Shortage of lots and skilled labor, rising cost of land, materials and labor and a declining level of new homes in inventory are not making things easier for these builders. Moreover, the recent spike in mortgage rates and rising home prices are hurting demand. As a result, many companies saw declining order trends in the last two quarters.
A slew of data released recently clearly show that the housing sector had it tough in the near past. (Read: 3 Commodity ETFs beating the market in 2014)
Homebuilder confidence, as indicated by the National Association of Home Builders(NAHB)/Wells Fargo housing market index, dropped to 47 in both April and March and 46 in February from 56 in January, indicating increasing builder concerns about meeting ongoing and future demand thanks to a shortage of lots and labor.
New home sales also dipped 3.3% in February as the weather remained bitter and supply constraints continued to plague homebuilders. Moreover, March's new and existing home sales were both weaker than expected.
However, as the winter chill subsides and builders prepare for the upcoming spring selling season, improving trends may well be on the cards. Builders are increasing their inventory of homes, as they anticipate a relatively strong spring buying season. This might propel homebuilder stocks higher in the months ahead as demand for new homes rise. (Read: Will Retirement ETFs fall out of favor with investors?)
Albeit interest rates are rising, but these are below historical levels and housing is still affordable. In addition, accelerating job growth, an improving economy and unlocking pent-up demand will likely boost demand for new homes for the rest of the year. Also, the average selling price continues to rise and, across the industry, is at all-time highs.
Housing starts grew 2.8% in March after declining 0.2% in February and 16% in January, indicating that steady gains in construction activities can be expected over the spring and summer months.
NAHB also expects 2014 to be a strong year for housing, expecting a big increase in single-family construction.
Moreover, homebuilders will gain from the still low interest rates despite the Reserve’s scaling back of the bond buying program. For most of 2013, the Fed bought $85 billion in government bonds and mortgage backed securities a month. Now it is buying $55 billion a month. 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 (read: 3 Sector ETFs Benefiting from Plunging Interest Rates).
ETFs to Tap the Sector
With this in mind, it could be time to give this segment a closer look. For investors looking to play the homebuilding sector in a less risky way, an ETF approach can be a good idea.
This technique can help to spread out assets among a wide variety of companies and reduce company specific risk at a very low cost. Below, we highlight three ETFs that are worth looking into in this sector.
SPDR S&P Homebuilders (XHB - ETF report)
XHB is one of the more popular homebuilding ETFs in the market today with assets under management of around $1.69 billion and a trading volume of roughly 4.0 million shares a day. The fund has an expense ratio of 35 basis points.
The fund holds 37 stocks in its basket, with 45% of the assets going to mid cap and 13% comprising large cap stocks. Despite the smaller holding pattern, the fund does not appear to be concentrated in the top ten holdings.
The fund has just 32.1% in the top ten holdings with Whirlpool Corporation, Trex Company Inc, and A. O. Smith Corporation occupying the top three positions with asset allocation of 3.47%, 3.41% and 3.26%, respectively.
The fund’s assets include 27% homebuilders, 21% household appliances securities, 24% specialty retail stocks and the balance 29% of building materials companies. The fund carries a Zacks Rank # 3 (Hold) with a high level of risk.
iShares Dow Jones US Home Construction (ITB - ETF report)
Another popular choice in the homebuilding sector is ITB, which tracks the Dow Jones U.S. Select Home Construction Index. It has $1.54 billion in assets with a trading volume of roughly 4.6 million shares a day, while its expense ratio is just 45 basis points.
The fund holds 34 stocks in its basket, out of which only 11% are large cap securities. The fund has a concentrated approach in the top 10 holdings with 61.9% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Lennar, D.R. Horton, Inc. and Pulte with asset allocation of 9.98%, 9.61% and 9.42%, respectively.
Homebuilders account for around 65.0% of this fund. The fund carries a Zacks Rank #3 (Hold) with a high level of risk.
PowerShares Dynamic Building & Construct (PKB - ETF report)
This ETF comprises around 30 housing companies and has its assets invested across all classes of the market spectrum. Engineering and construction stocks comprise 27.4% of the fund, followed by construction materials companies that account for 13.2%. A look at the style pattern reveals that the fund has a preference for value stocks.
The fund manages an asset base of $122.8 million and has an expense ratio of 63 basis points. The fund has only 15% in large cap securities and 46.1% in the top ten holdings. The fund carries a Zacks Rank #3 (Hold) with a High level of risk.
To Sum Up
Though a frigid winter and rising home prices did put the brakes on a housing recovery last quarter, homebuilders are increasingly optimistic of improving demand in the upcoming spring selling season. Many homebuilders noticed that both traffic and sales volume showed a steady improvement in January and February as they left the seasonally slowest months behind them.
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