Weak job creation: Unemployment is still high at 7.3%, and many of the average monthly jobs being created recently are merely part-time or service industry jobs with low wages that are not conducive to growing home ownership. In fact, home ownership rates have continued to decline in recent months. Some younger consumers are also shunning home ownership, and are inclined to view renting as a more flexible and favorable life style. Newer apartment complexes often cater to these consumers whims with in-ground pools, fitness rooms, bike trails, etc. People pay more to have these benefits, but seem unwilling to trade them for the lawn mower and backyard barbecue lifestyle of home ownership.
Rising interest rates: The decline in housing stocks over the second half of 2013 is directly attributable to talk of the Fed Tapering its monthly purchases of bonds, and the resultant rise in interest rates that it produced. While no set decision has been reached regarding how and when the Fed will begin to taper off on its purchases, it would cause a sharp rise in interest rates in 2014. The one-two combination of rising rates and home prices could land a knock-out punch to homebuilder stocks.
Healthcare costs: With the shaky roll-out of Obamacare, there is a great deal of uncertainty among consumers as to how much they will have to pay for health insurance and medical costs. As young consumers in the 27 to 39 year old age group begin to pay more for health care, it will reduce the amount of money available to them to save for housing related down payments and closing costs. This, more than any of the other factors mentioned, could put a serious crimp into home sales in 2014.
With all of the uncertainty surrounding the housing market, I believe the housing stocks will continue to underperform the general market in 2014, and I would not buy these stocks at their current levels. With a difficult real estate market ahead, it would not surprise me to see many of these stocks drop another 15% to 20%. For those who are still inclined to have a small portion of their portfolio in housing stocks, XHB will offer a safer and less volatile alternative to the individual builder stocks.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.