Homebuilder ETFs Under Pressure As Government Drags Its Feet

Includes: ITB, XHB
by: Tom Lydon

After swinging back in September, the housing market and homebuilder exchange traded funds could hit a snag as the government shutdown delays new home loans.

With the first partial government closure in 17 years, borrowers in the process of filing for home loans could be delayed as lenders are unable to verify Social Security numbers and access Internal Revenue Service data, Bloomberg reports.

Moreover, borrowers seeking approval for mortgages backed by the Federal Housing Administration will also have to wait, and the U.S. Department of Agriculture won't take new applications for mortgages in rural areas.

"The last thing we need is anything that shakes the confidence in a softly recovering housing market," David Stevens, chief executive officer of the Mortgage Bankers Association and former head of the FHA, said in the article. "If it's a short-term shutdown, it's a story about these employees put out of work. If it's long term, it's a broader story about the adverse impact to the economic recovery."

Economists calculate that a partial shutdown could shave 0.1 percentage point from economic growth in one week, with costs accelerating as time progresses.

Jay McCanless, an analyst with Sterne Agee & Leach Inc., believes that builders that cater to buyers using FHA financing are most at risk of slowing sales. These companies include D.R. Horton Inc. (NYSE:DHI), Lennar Corp (NYSE:LEN) and KB Home (NYSE:KBH).

"Unless the shutdown turns into weeks rather than days, we do not expect a decrease in demand since the FHA stoppage should delay rather than cancel closings," McCanless said.

The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) gained 8.0% over the past month while the iShares U.S. Home Construction ETF (NYSEARCA:ITB) rose 9.4%. Year-to-date, XBH is up 16.1% and ITB is 6.4% higher.

Looking at the ETF holdings, ITB has 10.0% in LEN, 9.3% in DHI and 3.2% in KBH. XBH has 3.2% in LEN and 3.2% in DHI.

SPDR S&P Homebuilders ETF

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own XHB.

Disclosure: I am long XHB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.