The S&P/Case-Shiller U.S. National Home Price Index posted a 4.5 percent year over year gain in January 2015 following a 4.6 percent jump in December 2014. But on a month-to-month basis, the index declined for a fifth month straight, falling 0.1 percent in January amid a harsh winter.
Multi-family housing starts have rebounded back to 2007 levels, running at 97 percent of prerecession highs. Single-family housing starts are at just a third of the way to their previous high. Housing supplies remain tight and the rate of new orders should improve unless there’s a significant spike in mortgage rates. As of February, there was 4.6 months of supply of homes on the market, the same as January. That falls short of the six months of supply that is considered a healthy balance between supply and demand.
Investment Risks
Home builder shares are very volatile. Home builders have very thin gross margins. Higher-than-expected increases in materials and labor costs, reluctance of lenders to write mortgages and rising interest rates would reduce affordability, especially among first-time home buyers. Home prices are rising much faster than wages.
ETFs And Mutual Funds
The home building industry has very low barriers to entry and is very fragmented. The top five U.S. home builders by revenue accounted for only 18 percent of the market in 2013, according to Morningstar. I recommend investing in homebuilders through SPDR S&P Homebuilders ETF(XHB), iShares US Home Construction (ITB) or Fidelity Select Construction & Housing Portfolio (FSHOX), which returned 9 percent year to date.
XHB holds homebuilders, building-materials producers, home-improvement retailers and home-furnishing retailers in a 35-stock portfolio.
iShares US Home Construction (ITB) overlaps considerably with 37 names. The major difference between the two is that XHB is equal weighted and ITB is market-cap weighted. XHB has greater exposure to home furnishing and home improvement retail stocks than ITB.
UBS rolled out in March more pure plays on homebuilders with ETRACS ISE Exclusively Homebuilders ETN (HOMX) and ETRACS Monthly Reset 2x Leveraged ISE Exclusively Homebuilders ETN (HOML). But they’re very thinly traded because they’re so new.
Michael Passante is a portfolio manager at Focused Wealth Management, a registered investment advisory firm in Highland, N.Y.
This copy is for your personal, non-commercial use only. Reproductions and distribution of this news story are strictly prohibited.