Seeking Alpha
Long/short equity, dividend investing, ETF investing
Profile| Send Message| ()  

I have been thinking of diversifying more into U.S. assets with the loonie flying so high, and finally managed to overcome the forces of inertia last week to transfer some Canadian funds into my U.S.-dollar brokerage account. After the bank took its hefty currency conversion fee, the exchange was completed at almost parity.

What asset to buy?

The S&P 500 has almost doubled from its early 2009 low. U.S. bonds have also had a price run-up — plus are looking vulnerable to inflation concerns. So that leaves the still-depressed U.S. real estate sector for the bargain hunter (the S&P/Case-Shiller Home Price Index is only 3.3% above its April, 2009 low).

Homebuilder ETF as a proxy for U.S. real estate

But buying real properties is such a hassle. So I was thinking of using the SPDR S&P Homebuilders exchange-traded fund (XHB) as a proxy for exposure to U.S. real estate. It tracks just over 2 dozen companies tied to the U.S. housing sector (homebuilders such as NVR Corp. (NVR) and retailers such as flooring company Armstrong World Industries Inc. (AWI))

May require 3+ year investing horizon

Many people say U.S. housing could remain depressed for years. One stat they cite is the “shadow inventory” of existing houses for sale (includes houses with mortgages in default and likely to become foreclosure sales). By some counts, this inventory would take nearly two years to clear, more than 4 times the norm.

But affordability has never been better

I’m prepared to wait. But I suspect the recovery could come sooner. For one thing, U.S. housing has never been as affordable. The NAHB/Wells Fargo’s Housing Opportunity Index says that 74% of homes sold in the U.S. were affordable to families earning the median income. In its 25-year or so history, this index has never been above 70% (until recent quarters).

And pent-up demand is growing

Another consideration is pent-up demand. Economists at the National Association of Homebuilders (NAHB) estimate that there are “2.1 million missing but expected households that have been delayed due to the Great Recession.” These are younger persons in their twenties and thirties who are still living at home with their parents, and individuals who have doubled up with roommates.

Don’t overlook population growth either

Jeffry Chmielewski, a private investor and former hedge-fund manager, notes in Homebuilders: Perhaps One of the Best Buys of the Decade that the steep drop in new home construction from 2008 to 2010 brought the number of housing starts during the 2000s back in line with the historical tendency for housing starts to track population growth.

So, if the coming decade experiences population growth at the historical rate, 13- to 15-million new houses will need to be built in the U.S. by 2020. With inventories of new construction currently at all-time lows, housing starts “will need to double or triple in order to keep up with population growth,” Mr. Chmielewski estimates.

Disclosure: The planned purchase of XHB adds to an existing holding.

Source: Using XHB to Diversify Into U.S. Assets