Encouraging Signs on the Housing Front

Published on Wednesday, 23 May 2012 20:46 Written by Todd Shriber

It goes without saying that homebuilders stocks are on the higher end of the risk spectrum and it’s also clear that this sector is extremely sensitive to U.S. economic data points. These stocks and their corresponding ETFs need strong consumer and employment data coupled with solid home sales news to draw investors in.

To that end, it’s a pleasant surprising that the iShares Dow Jones US Home Construction Index Fund (NYSE: ITB) has gained almost 6% in the past month while the SPDR S&P 500 (NYSE: SPY) has slid 3.7%. On a technical basis, ITB appears to have found support at $14.75 and near-term upside potential could be foreshadowing a move to $17. That is, of course, if the broader market and data cooperate.

The broader market will do what it will do, but in just the past two days, there have been signs of improving health in the U.S. residential real estate market. On Tuesday, the National Association of Realtors said homes sales jumped 3.4% in April from March to a seasonally adjusted annual rate of 4.62 million. That’s still below the 6 million economists deemed as indicative of a healthy housing market.

That particular data point was somewhat tepid, but still encouraging nonetheless. On Wednesday, the Commerce Department said new home sales 3.3% last month to a seasonally adjusted rate of 343,000 up from 332,000 in March. The median price was $235,700, a 0.7% increase from March. Both of Wednesday’s data points were a bit stronger than Tuesday’s and they help explain a 1.9% jump on better than double the average daily volume for ITB.

At the moment, the knocks on ITB are obvious and arguably too simple to buy into a prolonged bear case for the ETF. The ETF is up 29.4% year-to-date, well ahead of the S&P 500 and scores of other sector funds. Along those lines, bears would argue that’s just a matter of time before broader market weakness will catch up with ITB and its primary rival, the SPDR S&P Homebuilders ETF (NYSE: XHB).

On the other hand, it must be acknowledged that the housing market is a forward-looking indicator. What that means is that the most recent data could be a sign that there is more upside to come in the housing market. In turn that should logically lead to more upside for ITB and XHB.

Adding to the potential for more upside in ITB is the ETF’s combined 14% exposure to home improvement and furnishings retailers, or the discretionary side of residential real estate. This exposure has already served investors well when consumer data has been solid. Coupled with some strong employment data in the back half of the year, ITB could offer breakout potential beyond $17 for patient investors.