The Commerce Department recently announced that housing starts rose 10.5% last month to an adjusted annual rate of 598,000, giving positive price support to the SPDR S&P Homebuilders ETF (XHB), the iShares Dow Jones Home Construction (ITB) and the PowerShares Dynamic Building/Construction ETF (PKB).
In general, housing starts are an important indicator of activity in the real estate markets and as starts increase, future construction generally remains healthy. However, the opposite in this recent surge in new home construction is likely to prevail due to supply and demand imbalances and eventually hinder the real estate markets.
An excess of supply is likely to be seen in the coming months as the massive number of home foreclosures, repossessions and properties sitting on bank’s balance sheets are expected to hit the market. This imminent surge in supply is anticipated to push inventories of existing homes close to 12 months, if not even higher.
Furthermore, demand for residential real estate is not likely to see a significant uptick any time soon. Although the Federal Reserve has pushed lending rates to near record lows, many are unable or unwilling to take advantage of these low interest rates. Additionally, companies still remain reluctant to increase headcount even though many are posting increased profits and have an abundance of cash. At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected, and the only way to fix this is through the stabilizing of the labor markets. It’s awfully difficult to obtain a mortgage — or better yet, keep paying a current mortgage — without a job.
As a result, the supply and demand imbalance in the housing markets is likely to cause the recent big swing seen in housing starts to be reversed in the coming months, resulting in negative price support for homebuilders.
As mentioned above, ETFs that are likely to be influenced by microeconomic forces in the real estate markets include:
- SPDR S&P Homebuilders (XHB), which includes numerous holdings that are directly correlated to the performance of the residential real estate sector such as Williams-Sonoma Inc (WSM) and flooring company Armstrong World Industries (AWI)
- iShares Dow Jones Home Construction (ITB), which includes homebuilders like D.R. Horton Inc. (DHI), Pulte Group (PHM) and Lennar Corp. (LEN) in its top holdings.
- PowerShares Dynamic Building/Construction ETF (PKB), which includes DR Horton, Home Depot (HD) and Lowe’s (LOW) in its top holdings.
Disclosure: No Positions