Is the Worst over for the Housing Market? 
Ron DeLegge, Editor
April 28, 2009

SAN DIEGO (ETFguide.com) – “There’s no place like home,” is a popular expression that’s become less of a truism for both homeowners and homebuilders over this particular market cycle. Not only have home prices collapsed, but they’ve claimed closely associated victims in the banking, brokerage, and REIT sectors.

According to a published report from Standard & Poor’s, U.S. home prices experienced broad based declines during the month of February. The S&P/Case-Shiller 20-City Home Price Index fell at an annualized rate of 18.6%. And while February’s numbers were better than January’s, the U.S. housing market remains unhealthy. 

Housing inventory remains at stubbornly elevated levels. Economists estimate there’s a 10-month supply of unsold homes. In March, roughly half of existing home sales were from distressed sales like foreclosures and short sales. The median price for homes fell by 12.4% from March 2008.

Another closely connected factor to the housing market is employment. Naturally, if people don’t have work they can’t afford to buy homes, much less keep them. In March, the number of layoffs accelerated and looked particularly bad in the beaten up manufacturing sector.  

The Federal Reserve’s efforts to keep interest rates low for mortgage borrowers is definitely welcome, but its impact on the U.S. housing market has yet to produce a return to normalcy. Even though homebuilding and construction stocks have risen nicely this year, the sector is still working through its problems.

Let’s evaluate some of the key homebuilding and U.S. residential real estate ETFs.

SPDRs S&P Homebuilders (NYSEArca: XHB)
XHB is the most heavily traded homebuilder ETF. The fund’s index focuses on the homebuilders sub-industry portion of the S&P Total Market Index (TMI). The fund holds approximately 21 stocks. Companies within XHB are passively selected and equal weighed at the beginning of each quarter.

Year-to-date, XHB has risen 13.67%. In 2008, XHB declined 36.19% and the fund’s annual expense ratio is 0.35%. 

iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB)
The performance and yield of ITB are linked to the Dow Jones U.S. Select Home Construction Index. The fund’s index includes all homebuilding companies in the Dow Jones 2500. The fund contains just 28 stocks of companies that construct residential homes along with mobile and prefabricated homes.

Year-to-date, ITB has gained 13.05%. In 2008, ITB declined 41.84% and the fund’s annual expense ratio is 0.48%. 

iShares FTSE NAREIT Residential Index Fund (NYSEArca: REZ)
REZ is linked to the FTSE NAREIT Residential Index which measures the performance of the residential real estate sector of the United States equity market. Equity REITs invest primarily in real property and earn rental income from leasing those properties. Only companies valued at more than $100 million are included inside the fund’s index.

Year-to-date, REZ has fallen 19.82% and currently carries a yield in the vicinity of 11.8%. In 2008, REZ declined 31.07% and the fund’s annual expense ratio is 0.48%. 

iShares FTSE NAREIT Mortgage  REITs Index Fund (NYSEArca: REM)
REM is tied to the FTSE NAREIT Mortgage REITs Index. The index measures the performance of the residential and commercial mortgage real estate sector of the United States equity market.

Year-to-date, REM has lost 12.68% and currently carries a yield in the vicinity of 20%. In 2008, REM declined 42.79% and the fund’s annual expense ratio is 0.48%. 

Conclusion
While the YTD performance of homebuilding stocks has beaten the total U.S. stock market (NYSEArca: VTI) along with international stocks (NYSEArca: EFA) it would be fool-hearted to conclude the worst is over. Home prices have not yet fully recovered from their fall. Other closely associated sectors like banking (NYSEArca: KBE) along with mortgage and residential REITs remain stuck in the mud.

Nevertheless, there are a few positive signs for the housing market. Favorable long-term borrowing rates are on the side of new homebuyers. According to Freddie Mac, 30-year fixed rate mortgages averaged around 4.80% over the past week. Another positive factor too, is that homes are more affordable today than before. Can you say, “Home sweet home?”