Have the Homebuilding Stocks Bottomed Out?

Existing home inventory levels have risen so far in 2020 due to pandemic shutdowns, but long-term trends continue to fall, with May inventories dropping 18.8% compared to 2019. That will change if COVID-19 continues to undermine economic growth because most unemployed folks won't have the resources or credit ratings to obtain mortgages. This is especially true with the millennial demographic, which has been hit hard by layoffs in service industries.

Sales of existing homes fell sharply in May, dropping 9.7% compared to April and 26.6% on an annual basis. This marks the most severe rate of decline since 1982, when interest rates soared to nearly 20% under the leadership of Fed Chair Paul Volcker. Real estate professionals insist that May will be the worst month for sales, with improvement through the rest of 2020. However, you wouldn't expect them to express a skeptical view because they need a major uptick to preserve their incomes.

Home sales will be held hostage to COVID-19 developments into the spring of 2021, like much of the economy, with an effective vaccine or herd immunity then allowing the world to move past a dark chapter in history. Those who say they know what's going to happen between now and then are likely to be stakeholders making self-serving predictions because this is uncharted territory, as folks in the Southern and Southwestern states have discovered in recent weeks.

Chart showing the share price performance of the SPDR S&P Homebuilders ETF (XHB)

The SPDR S&P Homebuilders ETF (XHB) confirms that market players believe the sector has bottomed out, with bullish price action off March's seven-year low. This fund came public in the mid-$40s in February 2006, right at the height of the real estate bubble, and entered an immediate downtrend that posted an all-time low at $8.00 in March 2009. The subsequent uptick took more than four years to complete a round trip into the 2008 high in the mid-$20s.

The uptrend stalled at the .786 Fibonacci selloff retracement level in 2015, imposing a barrier that wasn't mounted until the fourth quarter of 2017. That buying impulse reversed in early 2018 after reaching the 2006 high that was posted during the first week of the fund's public life and then sold off into year end. A second trip into resistance triggered another reversal in January 2020, ahead of a third turnaround just two weeks ago. Given the tenacity of that ceiling, there's no logical reason to take exposure at this time.

Chart showing the share price performance of the iShares Dow Jones US Home Construction Index Fund ETF (ITB)

The iShares Dow Jones US Home Construction Index Fund ETF (ITB) came public in the upper $40s just two months after XHB and also entered an immediate downtrend, bottoming out at an all-time low in the single digits in the first quarter of 2009. It completed a round trip into the 2008 high in the low $20s in 2012 and broke out, stalling near the .50 selloff retracement level in 2013. A shallow uptick then took control, adding just four more points into the second quarter of 2017.

The uptrend accelerated into 2018 but came up short, reversing less than four points under the 2006 high. A second trip into this price zone in 2020 closed the distance, posting a nominal new high before the pandemic triggered a failed breakout and vertical decline to a four-year low just above the 2016 low. The second quarter uptick is now stuck at the .786 Fibonacci selloff retracement level about six points below the prior peak, in a neutral stance that favors neither bulls nor bears.

The Bottom Line

Two top homebuilder and home construction funds are acting well as we near the end of the second quarter, trading near 2020 highs in reaction to real estate industry predictions that home sales have bottomed out after the first quarter shutdown.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.