The Long-Term Case For Housing ETFs

The SPDR S&P Homebuilders ETF XHB is down 2 percent year-to-date, a performance that lags both the S&P 500 and the Consumer Discretionary Select Sector SPDR XLY. However, that's not preventing some analysts from sounding a bullish tone on the state of the U.S. housing recovery.

XHB differs from rival homebuilders ETFs due to its robust exposure to the discretionary/retail side of the residential real estate industry. That includes an almost 8 percent weight to home improvement retailers, a group that is expected to deliver some of the most impressive earnings growth in the broader consumer discretionary sector.

XHB's discretionary exposure is substantial, as the ETF allocates over 33 percent of its combined weight to home furnishings retailers, home improvement chains and home furnishings manufacturers.

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“Various housing and related statistics bottomed in early to mid-2009. Since then, for a time, the on-and-off, then on-again nature of the federal housing credit spurred, or at least pulled forward, primarily entry-level buyer housing demand,” said Fitch Ratings in a recent note. “With the US economy moving from recession to expansion in third-quarter 2009, plus very attractive housing affordability and government incentives, housing was jump-started. However, faltering consumer confidence, among other issues, had largely restrained the recovery. New home sales and single-family starts retested the bottom during the summer of 2010 and in February 2011.”

Housing prices are much more expensive than they were in the 1970s or 1980s and have even been on the rise since the trough following the housing bubble of 2007. However, Robert Schiller has shown house values generally appreciate at right around the rate of inflation in the long term, Benzinga reported last week.

Although the current bull is more than seven years old, XHB is still well off its all-time set prior to the financial crisis. In fact, the homebuilders ETF would need to add about 33 percent to reclaim that high.

“We believe this year looks to be another year of expansion for housing. If mortgage rates should rise sharply from current levels or credit terms tighten further, then Fitch's housing forecast for 2016 could turn more pessimistic. Of course, should the economy experience another recession, the housing downturn would resume,” adds Fitch. “In addition, although housing inventories seem to be relatively slim, an economy slipping into recession could inflame issues, such as negative buyer psychology and home price erosion relatively quickly, which can lead to a falloff in demand and bloated inventories.”