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A new report out last month suggests that a housing recovery may be underway. And two exchange-traded funds (ETFs) have been riding the wave.
As I wrote in late March, the iShares Dow Jones U.S. Construction (NYSE: ITB) and the SPDR S&P Homebuilders (NYSE: XHB) ETFs 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: TOL), Home Depot (NYSE: HD), and Lowe’s (NYSE: LOW), has risen an amazing 36% this year. The ETF is up more than 3% since August 1.
Meanwhile, the XHB, whose 37 holdings include building supplier Masco Corporation (NYSE: MAS) and home décor designer Pier 1 Imports (NYSE: PIR), is up more than 24% this year, including 3.6% in the last week.
The recent upward move may have something to do with what appears to be increased housing demand. It’s also a good reason to think that these ETFs still have plenty of room to rise.
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 3.49% – the lowest on record since long-term mortgages began in the 1950s. The average 15-year mortgage rate dropped to 2.8% – also a record low.
If nothing else in this slow-growing economy, the microscopic mortgage rates seem to finally be working the way they were intended. 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 has served as a harbinger that a housing recovery might actually be imminent. A few more reports like the one out last month, and suddenly the recovery will seem more like reality than the long-awaited hope of cockeyed optimists and impatient real estate investors.
It’s been a long time since the U.S. housing market was in recovery mode. The entire industry is still licking its wounds from the 2008-2009 subprime mortgage crash.
Despite recent gains, both the ITB and XHB are still trading well below their pre-recession, late-2008 prices. Five years ago at this time, both ITB and XHB were trading for more than $27 per share. Today ITB shares can be had for about $16.50 a pop, while XHB opened the morning at $21.59 a share.
Investors tend to like good news. Should there be more good news about a housing market desperate for positive signs, odds are these two ETFs will continue to rally.
Put simply: If a sustainable housing recovery is underway, it’s not too late to profit from it.