Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Housing's Headwinds Remain Intact

By

Why a high-flying homebuilder ETF may be a bad bet.

PrintPRINT
Investors are moving in with the homebuilders.

The iShares Dow Jones US Home Construction Index Fund (ITB), an ETF that invests mostly in the homebuilders, but includes housing-related subsectors as well, is the second best performing sector fund that doesn't use leverage with a year-to-date total return of 10.12%, according to Morningstar. (The best performer is the SPDR KBW Bank.)

The average market capitalization of a company in ITB, notes Morningstar ETF analyst Patricia Oey, is $6 billion. In addition to homebuilders, which account for 70% of total assets, she points out that the ITB also holds building-material producers (13%), home-improvement retailers (8%), and furniture companies (5%).

The fund's top-three holdings include NVR (NVR), Pulte Homes (PHM), and DR Horton (DHI). The largest non-homebuilding holdings are Home Depot (HD), Lowe's (LOW), and building materials manufacturer Masco (MAS).

Investors, by committing capital to ITB, are betting on better times ahead for that rocked residential real estate market, says Oey.

"People think the worst is over, and that is when you enter these cyclical stocks," Oey tells us. "But whether or not we will see improvement is a different story."

Oey argues that credit conditions might have improved a bit, but high levels of unemployment and a wind down in government support for the housing industry all continue to represent real headwinds for the sector.

In addition, the analyst emphasizes that after a rip-roaring rally in 2009, the holdings of this fund are also now trading near their fair-value estimates, as forecasted by Morningstar equity analysts.

Bottom line: In Oey's opinion, ITB isn't in fact a smart investment right now.

More broadly, how goes the recovery in the US housing market?

Home Depot announced a better-than-expected profit and shared an improved outlook with investors on Tuesday. It followed Lowe's, which also beat the Street yesterday.

But Dr. Ed Yardeni of Yardeni Research emphasizes that the housing market remains the weakest link in the US economy.

"It has received lots of support that is about to be withdrawn," he wrote to clients this week. "The housing tax credit expires in April. The Fed will soon stop buying mortgage-backed securities. The FHA is tightening its lending standards. This could all cause a double-dip in housing activity and drive down home prices again."

Housing's leading indicators also signal a very slow recovery, Yardeni says, with housing affordability ticking down in December. It was 8.4% below the April 2009 high, he notes, but 34% above 2008 summer lows.

More news to mull over: The Standard & Poor's/Case-Shiller 20-City Home Price Index released Tuesday fell 3.08% year-over-year, about in line with expectations. Seasonally adjusting the month-over-month figure results in a rise of 0.32%.

Of the 20 cities, seven witnessed gains on a year-over-year basis, led by San Francisco, Dallas, and San Diego. The year-over-year decline was led by Las Vegas, with Sin City down 20.6%, followed by Tampa, Detroit, Miami, and Phoenix.

Overall, strategists note, the index fell to the lowest since July 2009. It's 4.8% above the low back in April 2009, but is down 29.4% from its record back in July 2006.

More challenges lie ahead, says Peter Boockvar of Miller Tabak.

"The slowdown in the foreclosure rate (now about 1/3 of sales down from a high of 1/2), the home buying tax credit, and the artificial suppression of mortgage rates have all helped to cushion the decline in prices but when much of this wears off this summer, the market will be put to another test," the equity strategist writes.

Let Ron Coby & Denny Lamson find you ETFs poised for big moves. Take a FREE 14 day trial to Minyanville's Grail ETF & Equity Investor newsletter. Learn more (including how to get a free autographed copy of Ron Coby's recent book).
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE