ETFs

Real Estate ETFs: Be Aware

By Kevin Grewal

Demand for housing has taken a major hit, evident by the record 17% decline in existing home sales recorded in December, and many suggest that downward price pressures in the near future are imminent. 

According to the most recent Standard & Poor’s (S&P)/Case-Shiller home price index annual report, home prices have gained roughly 4% from their 2009 lows.  Although this is promising, and the trends of the Case-Schiller are moving in the right direction, there are plenty of market forces that will likely work against the index and bring prices down.

First, inventory levels are remain elevated and are likely to trend upward.  According to the National Association of Realtors, monthly supply of existing homes increased nearly 11% to 7.2 months in December 2009 from November 2009.  These numbers are much lower than inventory numbers witnessed a year earlier, but remain well above the 6-month threshold. 

To add to the inventory woes, foreclosures are expected to flood the real estate markets.  Some real estate experts suggest that nearly 2 million foreclosures will take place in 2010 as the backlog in distressed properties is released.  Not only with this trend put downward price pressures on existing homes, but will likely bolster inventories. 

From a lending perspective, mortgage rates have been driven down by programs implemented by the Fed and its decision to keep interest rates at exceptionally low levels.  Although this is great for mortgage seekers, lending still remains relatively tight and these favorable rates are generally only available to those who have hefty down payments and high credit scores; this pool is not as large as it once was. 

To make things even worse for the real estate market, an optimistic economic assessment released by the Federal Reserve yesterday, failed to repeat its assertion that the housing market is improving.  Additionally, it appears that the extension of the $8,000 first homebuyer tax credit didn’t give the sector the boost that was so strongly desired. 

Lastly, from a macroeconomic perspective, until a sustainable turn in the labor markets emerges, existing home sales will likely feel downward price pressures. 

Some ETFs that should keep these forces in mind include:

  • the SPDR S&P Homebuilders (XHB), which holds home building stocks like Pulte Homes (PHM) and D.R.  Horton (DRH).  XHB closed at $15.15 yesterday.
  • the iShares Dow Jones US Home Construction (ITB), which holds home building stocks like Lennar Corporation (LEN) and NVR Inc. (NVR).  ITB closed at $12.34 yesterday.
  • the iShares Dow Jones US Real Estate (IYR), which focuses on commercial real estate holdings like Simon Property Group (SPG) and Vornado Realty Trust (VNO) and will likely be indirectly influenced by the housing market.  IYR close at $44.14 closed yesterday.

These ETFs have seen a nice uptrend over the past year, but this could come to an end.  To help mitigate the risks involved with investing in them, the use of an of an exit strategy which triggers price points that represent abnormal price weaknesses and an increased likelihood that further price weaknesses in these ETFs are likely to follow is of importance. 

According to www.SmartStops.net, such price points for these previously mentioned ETFs are: XHB at $14.65; ITB at $11.92; IYR at $43.05.  These price points fluctuate on a daily basis and are reflective of market conditions and volatility. Updated data can be found at www.SmartStops.net.

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