ETF Bulls Bet Spring Will Thaw the U.S. Housing Market

A Sold Sign Sits Outside a Home in Seattle, Washington
Figures from the National Association of Realtors showed that sales of previously owned houses and apartments - the majority of the market - slowed to an annual rate of 4.6 million in February. Photographer: David Ryder/Bloomberg

Build it and they will come, if it’s not too chilly.

Traders have turned bullish on a security that tracks home construction companies, appliance makers and furniture retailers as spring finally ends the harsh winter.

As the SPDR S&P Homebuilders ETF heads for its first weekly gain since February, investors are buying options betting that the rebound will keep going. The cost of bullish contracts has risen to the highest versus bearish ones in 2 1/2 years. The ETF has gained 2.2 percent this week.

The exchange-traded fund of companies such as Ryland Group Inc., Whirlpool Corp. and Home Depot Inc. has rebounded 8 percent after reaching its lowest level this year on Feb. 3 as investors attribute weakness in the housing market to winter weather. Between December and February, snow covered 1.42 million square miles of the continental U.S., the 10th-largest snow cover in records going back to 1966, according to the National Climatic Data Center.

“Market participants are speculating that the weakness we saw in the U.S. economy and the U.S. housing market in the beginning of the year was temporary and linked to the bad winter weather,” Mark Andersen, who helps manage $1.7 trillion as head of asset allocation at UBS AG in Zurich, said in an interview yesterday. “We’re witnessing an ongoing recovery in the U.S. economy, with the housing market also supported by employment growth and low interest rates.”

Faster Activity

The data for March show signs that the economy is picking up steam. Surveys of activity in the manufacturing and services sectors both show more rapid expansion last month. Companies are hiring people at a faster pace, according to the ADP Research Institute. The Labor Department’s monthly jobs report due at 8:30 a.m. in Washington today will show that hiring increased in the overall economy with 200,000 jobs added in March, according to forecasts compiled by Bloomberg.

As the economic data improves, traders are increasing their bets on further gains. Calls with an exercise price 10 percent above the SPDR S&P Homebuilders ETF cost 1.7 points less than puts betting on a 10 percent drop as of April 2, the smallest spread since August 2011, according to data on three-month contracts compiled by Bloomberg. Bullish contracts on the fund cost 4.4 points less on average than puts in the last year, the data show.

Harsh Winter

Winter had suppressed activity in the housing market. Figures from the National Association of Realtors showed that sales of previously owned houses and apartments -- the majority of the market -- slowed to an annual rate of 4.6 million in February. That was the smallest number of contract closings on existing properties since July 2012. The Commerce Department’s index of sales of new homes also dropped in February to an annualized 440,000.

The reports are reason for concern about the housing market, according to John Plassard, vice president at Mirabaud Securities LLP in Geneva. He remains bearish on companies in the homebuilding industry.

“While macroeconomic reports out of the U.S. were affected by the weather at the beginning of the year, I fear it can’t fully explain the weakness in the housing market,” Plassard said in an interview on April 2. “The outlook for the market isn’t very glorious. Borrowing costs are higher, and so are property values; with that mix, I wouldn’t be so sure that we’ll see a clear recovery just yet.”

The 30-year fixed-rate mortgage averaged 4.41 percent in the week through April 3, up from 3.54 percent a year earlier, according to Freddie Mac. Mortgage applications fell for the third time in four weeks in the five days through March 28, data from the Mortgage Bankers Association show. The S&P/Case-Shiller index of house prices in 20 cities climbed 13.2 percent in the 12 months through January.

Implied Volatility

Implied volatility, used to gauge the cost of options, for three-month contracts with an exercise price 10 percent below the homebuilders ETF fell 23 percent to 20.96 since Feb. 3, when the ETF set its lowest price this year, data compiled by Bloomberg show. That compares with a 15 percent decline for the measure for calls 10 percent above.

Bullish options betting on a 9.3 percent increase to $36 by June are the most owned calls, the data show.

The Chicago Board Options Exchange Volatility Index, the gauge of Standard & Poor’s 500 Index options prices, gained 2.1 percent to 13.37 in New York yesterday. The VStoxx Index, which measures expected volatility on the Euro Stoxx 50 Index, fell 2.6 percent to 15.95 at 11:19 a.m. in London today.

“A lot of the weak data we’ve seen has been dismissed under the assumption that a lot of it had to do with the weather,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which manages about $160 billion, said in a telephone interview yesterday. “A lot of the things that would ordinarily have been troubling are getting written off. In order for the rally to continue, we’ll need to see a greater willingness in borrowing.”

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