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ETF Specialist

Which Homebuilder ETFs are Well Constructed?

There are important differences between the two principal homebuilder ETFs.

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While home prices have stabilized since April 2009, they have shown little to nothing in the way of any kind of upturn since that time. And although the end of federal government support for the homebuilding industry--in the form of the June 30 discontinuance of the $8,000 first-time-homebuyer tax credit and the government concluding more than $1 trillion in government purchases of mortgage-backed securities in March--has not been followed by a step down in housing prices, the sector at best has shown tepidness. Indeed, while the Standard & Poor's/Case-Shiller Home Price Indices data released in late July showed that the annual growth rates of home prices improved in May compared with April, index officials hastened to add that we have been in a strong seasonal period for home prices. They also noted that there might have been some "residual impact" from the homebuyer-tax-credit program, given that it covered any new home purchase closing through June 30.

And with continued high unemployment and a generally declining stock market (leading to feelings of a negative wealth effect among consumers), new home sales have been choppy at best, with little evidence of a sustained recovery. For example, the U.S. Department of Commerce in late June reported that new home sales in May had fallen almost one third from April to a seasonally adjusted annual rate of 300,000, far below economists' estimates. After revising that May number to 267,000, the Commerce Department in late July reported a complete reversal, with new home sales increasing 23.6% in June to a seasonally adjusted annual rate of 330,000. And while the June number exceeded the 310,000 economists had forecasted, it was hardly worthy of a champagne toast, given that it still represented the second-slowest monthly sales pace since Commerce officials first started tracking such data in 1963. At this point, head fakes seem the norm, with the housing market still seemingly unable to string together consecutive rosy numbers.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.