Investor's Business Daily, August 23rd, 2007
The dismal U.S. housing market and subprime market woes have investors trembling. None quite so much as those with a stake in home building.
Exchange traded funds focusing on the bleak housing market were the worst performers last week. In the past month alone, the iShares Dow Jones U.S. Home Construction Index Fund ITB has fallen more than 21%.
The fund, which tracks the performance of the Dow Jones U.S. Select Home Builders Index, tumbled 33% over the past three months.
The poor housing market and credit crunch also took a toll on the SPDR S&P Homebuilders Index Fund XHB. During the same month, the SPDR fund plunged 17%. The fund tracks the performance of the Standard & Poor's Homebuilders Select Industry Index.
Bottoming?
But everything that comes down must go up, right? Maybe -- just don't count this particular sector turning around anytime soon, analysts say.
"For home builders in particular, I think they're looking at some time before they recover," said Sonya Morris, a Morningstar analyst who covers ETFs and real estate investment trusts.
The Commerce Department recently said housing starts fell 6.1% in July to 1.38 million annualized units, the lowest level in more than 10 years.
The problem isn't just the sluggish housing market. "There's also the actual and perceived reaction to the subprime crisis, and everything's been going down across the board," Morris said. "It's not an easy place to dig out of."
Once-strong performers among the top holdings on the Dow Jones Homebuilders Index, for example, are struggling hard right now. Pulte Homes PHM fell below its 10-week line in early June and still hasn't risen above it. Lennar LEN has echoed that dance, although it managed to hit the 10-line once.
Other Holdings
Centex CTX has the same problem.
The only top holding on the index that looks healthy is Champion Enterprises CHB. The company's saving grace is its product diversification and European acquisitions.
It's been pushing sales of its modular homes by working with builders instead of retailers. A recent acquisition, U.K.-based Calsafe Group and its Caledonian Building Systems subsidiary, have shown a strong profit this year. It produces steel-frame units that can be used commercially.
With domestic home building so gloomy, some investors have started paying more attention to international real estate ETFs as an alternative. Yet the risk there also is high, Morris cautions.
"REITs reached the stratosphere and their valuation has peaked," she said. "We could see their valuation weaken further. "
Patience might still pay off, though. "We recommend that you shouldn't invest in ETFs unless you plan to do it long-term," Morris said.
