Market Insights

Housing stocks are on the move as Wall Street looks for a rebound in the industry.

The iShares US Home Construction ETF (ITB) is up more than 2 percent in the last week. That makes it one of the best-performing major industry exchange-traded funds (ETFs) over that period.

Optimism about the future has been the main catalyst. Lennar (LEN), the second-biggest holding in ITB, helped fuel the move with this comment yesterday morning:

“We clearly saw traffic and sales accelerate through the first quarter,” company chairman Stuart Miller said on a conference call. “We are optimistic that demand driven by fundamental economic strength will continue to accelerate through the spring selling season.”

That comment overshadowed negativity from weak quarterly results and drove LEN to its highest close since mid-September.

Low interest rates have provided another major boost, with the cost of a 30-year mortgage at its lowest level in over a year. So far prospective borrowers are taking the bait, increasing their loan applications by almost 9 percent last week.

Companies in the iShares Fund

ITB focuses mainly focuses on builders of houses, with a smaller emphasis on suppliers:

• D.R. Horton (DHI): This Texas-based company the country’s biggest player. Its last set of numbers back on January 24 were nothing to write home about, but it’s still managed to push higher since.
• Lennar (LEN): The No. 2 U.S. homebuilder targets first-time and move-up buyers.
• NVR (NVR): The Virginia-based company also targets first-time and move-up buyers.
• PulteGroup (PHM): Surprisingly, this homebuilder is the second-best performing member of the S&P 500 in the last week. Like DHI and LEN, its last set of numbers was less than stellar.
• Toll Brothers (TOL): The top U.S. luxury-housing name. It’s been one of the weaker stocks, possibly because investors view the higher-end of the market as less dynamic. Remember, gains in the economy have been coming at the lower ends of the income scale recently.

Other big companies in ITB include Lowe’s (LOW), Home Depot (HD) and Sherwin Williams (SHW).

Glass Half Full?

Economic reports on the housing sector haven’t featured many positive surprises. But, they’ve shown a pattern of steady, grudging improvements. February’s housing starts and building permits, for instance, both missed estimates. January’s new home sales also lagged projections. However, both have roughly doubled from the 2010 bottom and are now stabilizing.

When you look at the demographic trends of millennials needing homes and limited inventories, it makes sense why experts see the potential for more construction.

That may be especially true considering the strength of the consumer and labor market. Just today, for example, initial jobless claims fell more than expected. January’s retail-sales data also beat estimates earlier in the month.

Those reports, plus a few others, have caused the Atlanta Federal Reserve to sharply increase its estimate for first-quarter growth. Its running GDPNow calculation has ratcheted up to 1.5 percent from just 0.3 percent at the start of March.

In conclusion, homebuilders have been outperforming the broader market as investors view the glass as half-full. Bad news has mostly been ignored as they look for the sector to keep rebounding from last decade’s big crash. The big question now is how long they’ll be willing to keep the faith if numbers don’t improve.

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.