As anyone who has ever seen a home improvement show knows very well, the housing market can move up and down depending on changes in consumer behavior and economic conditions. In recent weeks, the home construction industry has been dealing with a few breaks that could spell trouble for the sector over the next several months.
First, the Home Construction ETF (ticker: XHB) has seen a marked decline in recent weeks. XHB consists of stocks of home builders and related companies such as building materials companies, and its losses indicate a potential decline in the housing market. This could be due to worries about the future of the U.S. economy, or any of a variety of other factors, but it does suggest that investors are becoming more bearish on the industry.
Second, a major home builder, D.R. Horton (ticker: DHI) has recently broken through a key level of technical resistance. Technical analysis—the practice of analyzing stock movements in order to identify patterns and trends—has indicated that when DHI falls below this level, it can be a sign of further downside. This suggests that, even if the overall housing market does not collapse, investors should be prepared for some additional drop from DHI.
Finally, the perceived risks for home construction and development companies are increasing. Banks are tightening their lending standards, and homeowners are facing low wage growth, so a dip in overall demand for housing could be in the cards. This could lead to further losses for the home construction industry, and especially for the larger companies that are currently represented in XHB.
For investors, the home construction sector offers some potential benefits. Homebuilders tend to be more responsive to economic changes, so any moves in the housing market could result in some significant profits. However, investors would be wise to exercise caution until the future of the housing market—and the home construction sector—becomes more clear.