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Trouble Lurks for Homebuilders ETFs

This article was originally published on ETFTrends.com.

Homebuilders stocks and the related exchange traded funds recently rallied, albeit modestly, off 2018 lows, but some market observers believe the group remains vulnerable to additional downside.

The SPDR S&P Homebuilders ETF (XHB) , iShares U.S. Home Construction ETF (ITB) and Invesco Dynamic Building & Construction ETF (PKB) are still sporting significant year-to-date losses.

“The XHB homebuilders ETF and ITB home construction ETF are both tracking for their worst years since 2008, the middle of a housing crisis that demolished the group,” reports CNBC. “They now face a make-or-break level, said Todd Gordon, founder of TradingAnalysis.com.”

Some recent encouraging data points facilitated a rally in homebuilder ETFs. Over the past week, XHB is up more than 4%. Supporting the gains in the homebuilder sector, the Census Bureau revealed the homeownership rate was 64.4% in the third quarter, compared to 64.3% in the prior three months and 63.9% a year earlier, Bloomberg reports.

More Pain Ahead?

XHB features significant exposure to consumer discretionary and retail stocks that are tied to the residential real estate trade.

XHB “seeks to provide exposure to the homebuilders segment of the S&P TMI, which comprises the following sub-industries: Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail, and Household Appliances,” according to the issuer.

A slew of retail stocks report earnings over the next two weeks, which could provide a catalyst or impetus for more selling for XHB.

“Gordon said the XHB ETF must hold above the support zone of roughly $31 to $34. If it breaks below this, new lows are highly likely, he said. The ETF also needs to hold its old lows of $25 to $26, added Gordon,” according to CNBC.

Declining prices could allow more buyers to enter the market, which could be a positive for XHB and rival funds.

“The group still faces its share of headwinds, including weakness in existing home sales, tight inventory and rising mortgage rates, but so long as job and wage growth continues, homebuilders should stay afloat,” said Mark Tepper, president of Strategic Wealth Partners, in an interview with CNBC.

For more information on the housing market, visit our homebuilders category.

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