ITB, XHB Ride Housing Recovery

A new report out today suggests that a housing recovery may be underway. And two ETFs have been riding the wave.

As our own Ian Wyatt wrote in late March, the iShares Dow Jones U.S. Construction (NYSE: ITB) and the SPDR S&P Homebuilders (NYSE: XHB) exchange-traded funds were a good way to play the impending housing recovery. At the time, the two ETFs were already doubling the S&P 500’s 2012 returns. Their performance has only improved since.

The ITB, which tracks major U.S. homebuilders and home improvement companies such as Toll Brothers (NYSE: TOLL), Home Depot (NYSE: HD), and Lowe’s (NYSE: LOW), has risen an amazing 41% this year. The ETF is up 10% in the last month alone.

Meanwhile, the XHB, whose 37 holdings include building supplier Masco Corporation (NYSE: MAS) and home décor designer Pier 1 Imports (NYSE: PIR), is up nearly 25% this year, including 7.5% in the past month.

The recent upward move may have something to do with what appears to be increased housing demand.

According to data released by real-estate firm Zillow, U.S. home prices were up 0.2% in the second quarter from the same period a year ago. It’s the first year-over-year increase in home values since 2007 – before the recession hit.

Perhaps the housing market has finally bottomed. Thanks to the Fed’s insistence on keeping interest rates near zero, mortgage rates have been establishing new lows on almost a weekly basis.

Just last week the average rate on a 30-year fixed mortgage dropped to 3.53% – the lowest on record since long-term mortgages began in the 1950s.

If nothing else in this slow-growing economy, the microscopic mortgage rates seem to finally be working. If home prices are up, that means demand is increasing. And that’s good news for housing stocks.

So it’s no wonder ITB and XHB have been on a run. Their rally this year served as a harbinger that a housing recovery might be imminent.

If those ETFs continue to rally, perhaps the recovery will have some staying power.