US Home Construction: A package of homebuilders

Investors can build long-term portfolio gains with this exchange-traded fund.

By TheStockAdvisors Jul 1, 2013 10:01AM

Home under construction (© Corbis)By Nicholas Vardy, Bull Market Alert


As uncomfortable as the recent sell-off has been, I believe that markets are overreacting to the Federal Reserve's announcement that it will gradually begin to wind down its quantitative-easing program. Once the markets adjust to this reality, I believe they will stabilize and resume their upward trend.


Our latest recommendation -- the iShares Dow Jones US Home Construction (ITB) -- focuses on a sector in the United States that has become extremely oversold, yet I believe it has strong fundamentals.


The iShares Dow Jones US Home Construction ETF tracks the Dow Jones U.S. Select Home Construction Index. Its biggest holdings include PulteGroup (PHM), Lennar (LEN), D.R. Horton (DHI), NVR (NVR) and Toll Brothers (TOL), which together account for 44.73% of ITB.


The ETF has fallen 13.49% since hitting its peak on May 20. Investors' knee-jerk reaction has been that higher interest rates will stop the housing recovery in its tracks.


Yet, I think the opposite is likely to happen. As interest rates begin to rise, potential home buyers will act sooner than later, encouraged by rising retail sales and consumer confidence.


I bet many consumers are already plugging in 4.5%, 5%, 6% figures into their mortgage calculators, spurring them to act sooner, rather than later.


In addition, more normal, market-determined levels may also encourage banks to allocate more funds to mortgage lending and reduce their abnormally stringent mortgage-lending standards.


For the longer term, the big-picture case for housing is extremely strong. Existing-home sales for May were up 4.2% from April to an annual rate of 5.18 million -- above the 4.97 million consensus estimate.


Over the past 12 months, total housing starts were up 28.6% and single-family starts rose 16.3%. Applications to build single-family homes are at their highest level since May 2008.


Small trucks favored by construction workers are flying off the lots. Population growth in the United States is creating demand for 14 million more houses over the next five years. Yet fewer than 6 million will be built by 2015. So, buy ITB at market, and place your stop at $18.25.


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