On Wednesday, it was reported that housing starts rebounded by a stronger-than-expected 8.9% in November. Embedded in that report was a small increase in single-family homes, which many feel is a big plus for the sector. But the numbers are closely tied to the government’s homebuyer tax credit program, which was extended into the spring.
Overall, though, it was a nice shot in the arm for the sector, and the major housing ETFs were up more than 2% on the day of the news. And that’s what we want to focus on.
SPDR S&P Homebuilders (XHB)
When you hear about homebuilders, the chart that’s inevitably thrown out there is of the SPDR S&P Homebuilders (XHB). Yet, despite its name, the ETF has little to do with homebuilders. Huh?
That’s right, XHB has just one homebuilder — NVR Inc. (NVR) — among its top 10 components, and NVR trades fewer than 40,000 shares per day.
Know what the top XHB holding is? Tempur-Pedic (TPX), as in the high-end bedding seller. Go figure. How about Bed, Bath & Beyond (BBBY) and Williams-Sonoma (WSM) also in the top 10? These don’t sound like homebuilders to us. Home furnishers, yes. Homebuilders? No way.
iShares Dow Jones U.S. Home Construction (ITB)
The iShares Dow Jones U.S. Home Construction (ITB), on the other hand, is much more representative of the homebuilding sector. It counts DR Horton (DHI), KB Home (KBH), Lennar (LEN), Pulte Homes (PHM) and Toll Brothers (TOL) among its top 10. Now that’s more like it.
So if you want to know how companies directly engaged in home construction are doing, check out the ITB.
ITB had a solid day Wednesday following the positive housing news and strong price action, but despite that, ITB is sitting at a crossroads. I’m seeing a few troubling technicals of note in the chart below.
First, the shares have been sagging for the past three months in a series of lower highs and lower lows.
Second, the past two peaks have been rejected by the 50-day moving average (currently at $11.80), which has once again kept the shares in check this week.
Third, the ETF is now closing in on a declining trendline that connects the peaks of the past few months (save the September surge).
What’s Ahead for the Housing Sector?
Housing is one of those sectors that everyone wants to do well because it, more than any other, is the bellwether for the economic recovery.
So many factors are connected to housing — interest rates, unemployment, consumer confidence, government programs, etc. — making it the gauge of how well we’re coming out of the nosedive. Such attention can lead to high expectations. And that can lead to vulnerability.
We’d wait to see if the positive reaction to the housing starts rebound has any follow-through before jumping into the sector, because there’s a very good chance that we may just be seeing another peak amid an overall downtrend.
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