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Will homebuilders like DHI capitalize on increasing home prices?

Phalguni Soni

Why this week’s key releases seem more about expectations (Part 7 of 9)

(Continued from Part 6)

Housing prices

As we mentioned in Parts 5 and 6 of this series, both the Federal Housing Finance Agency (or FHFA) Housing Price Index and the S&P/Case-Shiller Home Price Index recorded gains in January 2014, with Case-Shiller recording its 20th straight positive reading, while the FHFA purchase-only index recorded its 23rd straight positive reading.

How can investors profit from rising home prices?

Increasing housing prices would benefit ETFs that invest in the housing sector, if demand isn’t impacted. As we mentioned in Part 4, new home sales declined 3.3% month-on-month and 1.1% year-on-year to a seasonally adjusted annual rate of 440,000, for the month of February, as reported by the US Census Bureau. Now, this decline could be due to adverse weather in February keeping buyers at bay or as a result of low supply of new homes, especially entry-level homes. If it’s the latter case, this is the perfect opportunity for homebuilders like D.R. Horton (DHI) and KB Homes (KBH), which specialize in entry-level homes, to step in and meet the increased demand.

Major ETFs in the housing space include the State Street SPDR Homebuilders ETF (XHB), which tracks the performance of the S&P Homebuilders Select Industry Index—part of the S&P Total Markets Index. The top ten holdings in XHB include homebuilders D.R. Horton (DHI) and Toll Brothers (TOL).

Increasing home prices may also adversely affect demand for mortgage financing, as buyers may either postpone purchases or switch to all-cash transactions. ETFs with exposure to the mortgage market include the Vanguard Mortgage-Backed Securities Index Fund (VMBS) and the iShares Barclays MBS Fixed-Rate Bond Fund (MBB). Both track the Barclays Capital U.S. MBS Index, which measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

Key differences between the FHFA and S&P/Case-Shiller housing price indices

While both indexes measure price trends in the housing sector, there are several differences in approach between the two. Some of the major differences include the following.

  1. Most FHFA indices measure price changes for both home sale prices and home price appraisals based on refinancing data, while the S&P/Case-Shiller index uses only home sale prices.
  2. The S&P/Case-Shiller indices are value-weighted, while FHFA indices are equal-weighted.
  3. The data size and target area for the FHFA index is much larger, as it considers all states in the U.S., unlike the S&P/Case-Shiller index, whose data depends on the index considered—for example, ten cities, 20 cities, et cetera.
  4. The FHFA data is based on conforming conventional mortgage applications from Fannie Mae and Freddie Mac, while the S&P/Case-Shiller price data is sourced from county assessor and recorder offices.

To find out about other consumption-related retail data released for the week of March 24 to 28 that offer clues about the recovery, read on to Part 8 of this series.

Continue to Part 8

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