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ETF Plays For Housing Recovery

By Kevin Grewal

Over the past few months, the real estate sector has been outperforming analysts’ expectations and pleasantly surprising investors; however, there are plenty of signs to indicate that these gains are not sustainable or representative of the overall health of the sector. 
Most recently, the National Association of Realtors reported than existing home sales in October increased by 10.1%, on a seasonally adjusted basis, over prior month numbers. This is great news, because traditionally home sales increase in the first half of the year and decline in the second half. However, this deviation from history has likely been caused by the $8,000 first-time home buyer tax credit implemented by the Obama Administration. Some experts suggest that this growth is unprecedented because many home buyers thought the tax credit would expire on November 30th and rushed to complete sales and if it weren’t for this form of government stimulus, buyers probably wouldn’t have bought.
Additionally, the influx of home buyers has pushed supply and demand closer to equilibrium levels, which has had a positive effect on home prices. According to the latest data, the S&P Case-Schiller Index, one of the most closely watched real estate indexes and a seasonally adjusted index of housing prices in 20 major metropolitan U.S. cities, rose by 0.3% to a reading of 144.96 in September. This increase marked the fourth straight monthly increase in housing prices, however, showed weaker signs than in previous months. Of the 20 cities measured, 11 indicated month-over-month increases, as compared to much higher numbers in previous months. On a year-over-year basis, prices are still down by a smudge over 9%.
Granted, the tax credit has been extended until April of next year, mortgage rates are at low levels and prices are attractive compared to their highs seem in April 2006, but at the end of the day the sector will be driven by one force- unemployment rates. Regardless of what is said, national unemployment rates have to start to decline in order for the real estate sector to remain healthy. Buyers need to have a job and a way to prove income to obtain a mortgages, whereas, current homeowners need to hold onto their jobs to prevent any further elevation in foreclosure rates.
Some equities that have benefited from this recent uptrend in real estate include:
·         SPDR S&P Homebuilders (NYSEARCA:XHB) up 77% from a March low of $8.23 to close at $14.58 on Tuesday.
·         iShares Dow Jones US Home Construction (BATS:ITB), up 80% from a March low of $6.48 to close at $11.64 on Tuesday
·         iShares Dow Jones US Real Estate (NYSEARCA:IYR), up 93% from a March low of $22.21 to close at $42.90 on Tuesday.
With the extension of the tax credit and favorable lending rates, a short-term opportunity may present itself in the sector, but it is important to keep in mind the risks involved. To help mitigate the effects of volatility and other risks, an exit strategy is important. According to the latest data at, an upward trend in the mentioned equities could come to an end at the following price points: XHB at $14.20 ITB at $11.28 and IYR at $41.93. These price points reflect market changes and change on a daily basis. Updated data can be found at