Taper Concerns Put Focus on Homebuilder ETFs - ETF News And Commentary
December 13 2013 - 2:00PM
Zacks
Revised U.S. GDP data of 3.6% for Q3 against 2.8% predicted
earlier, a reduction in jobless claims, better-than-expected data
in non-farm payroll numbers and a continued surge in manufacturing
numbers renewed the taper concerns all over again in early
December.
While this economic good news may spread cheer within the nation,
some corners of the investment world, such as the homebuilding
sector, will likely be hit by this bullishness. The sector has been
a star performer so far this year courtesy of historically low
interest rates, but might falter in the coming days owing to the
rising rate concerns (read: The Comprehensive Guide to Homebuilders
ETFs).
Why Homebuilders are Worried
High interest rates make mortgage loans more expensive which in
turn weakens the demand for new homes. The prospect of tapering has
started to push up interest rates. According to the Freddie Mac
mortgage survey, the 30-year fixed mortgage rate moved up from
3.59% on May 23 to 4.46% on December 5.
In fact, the rate edged upward by 24 bps within just 15 days in
December following a slew of positive economic data. Both existing
and pending home sales declined 3.2% and 0.6% respectively for the
second successive month in October.
Quite expectedly, the data penalized the homebuilding
ETFs. The three funds tracking the sector –
iShares
Dow Jones US Home Construction ETF (ITB),
SPDR
S&P Homebuilders ETF (XHB) and
PowerShares
Dynamic Building & Construct (PKB) – have all seen
weakness over the past few trading sessions, and continue their
slump if rates soar higher.
What to Expect from the Sector?
Notwithstanding all concerns, the sector is poised to stay afloat
even if the Fed tapers, in our opinion. The following reasons
explain the prospects in the sector.
Interest rates are still well below average levels, keeping housing
still reasonably priced. Also a better job market and improving
consumer confidence from the lows it witnessed two years ago are
encouraging consumers to purchase new homes.
Plus, home inventories remain tight. A scarcity of land and labor
is restricting the construction of homes, both single and
multifamily. As a result, lower housing inventory and a
still-steady demand profile are raising the price of
properties.
The new home sales data bounced back in October following a
year-low plunge in September. By now, buyers are presumably immune
to the ups-and-downs in mortgage rates.
In short, there is still a considerable amount of pent-up demand in
the homebuilding sector that can pull it through the coming days
(read: 3 Homebuilder ETFs Leading the Pack this Earnings
Season).
Conclusion
Even though a sword of Damocles hangs over the head of the sector
with the imminent taper, we really do not believe this is something
to panic over. Builder confidence in the market for newly built,
single-family homes did not deteriorate further in November.
Forward looking projections are pretty assuring. As per the
National Association of Homebuilders, both single and multi-family
home sales will likely rise at around double the pace in the coming
year and the year after from 2013.
In fact, an expected 76 bps and 86 bps rise in fixed mortgage rates
in 2014 and 2015, respectively, are not expected to hold back the
housing recovery. Prime rates are guided to stay the same next year
and nudge up 5 bps in the next, so concerns may be limited for the
long term.
Most homebuilders believe the housing momentum will continue into
2014. Bearing these in mind, the ETF outlook on the sector also
appears promising. Presently, ITB has a Zacks ETF Rank #2 (Buy) and
XHB and PKB carry a Zacks ETF Rank #3 (Hold) (see more ETFs in the
Zacks ETF Center).
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ISHARS-US HO CO (ITB): ETF Research Reports
PWRSH-DYN BLDG (PKB): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
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