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Can Homebuilders Hammer Home a Rally?

XChange NewsletterNovember 28, 2023
white house with a red roof coming out of a hole in the ground, on a solid red background

Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

Mortgage rates remain steep. The housing market has tumbled into an affordability crisis. With high interest rates squeezing homebuilders, the bearish outlook on homebuilder stocks seems plausible. As the real estate market heads toward its slowest season, the question lingers: can homebuilders rally?

Homebuilder Earnings Surpass Pessimistic Predictions

Despite the worries that interest rates would squeeze homebuilders from both sides — raising borrowing costs for the companies and crushing demand for new homes — that squeeze doesn’t really seem to have played out.

In its Q3 earnings release, Lennar Corp (NYSE: LEN) reported a 37% increase in new orders on top of a $9.9 billion backlog of homes. While lower home prices did lead to a year-over-year decrease in revenue, the homebuilder still beat analyst forecasts (BuilderOnline). According to Nasdaq, this is the fourth quarter in a row that the company has beaten estimates.

Traders saw similar earnings surprises from NVR (NYSE: NVR), Pulte Group (NYSE: PHM) and other leading homebuilder stocks in the most recent earnings season.

With sentiment so low right now, traders could see even more outperformance before the year is up. Toll Brothers (NYSE: TOL) is expected to announce Q4 results on December 5. Meanwhile, Lennar’s Q4 earnings are expected on December 13.

Homebuilders Resilient Amidst Interest Rate Pressure

The key reason these stocks are able to outperform consensus estimates is that the housing market – the home construction market, in particular – doesn’t seem to be in the tailspin bears think it’s in.

Mortgage rates have curbed demand somewhat, but it seems to have had a bigger impact on supply as homeowners with pre-inflation interest rates locked in are reluctant to sell and take on a mortgage at these new rates.

With sales of existing homes down more than 15% year-over-year in September (CNBC), the inventory of available homes continues to be too low to meet demand (

Not only is that helping to prevent the crash or bubble burst that some are predicting in the housing market, but it’s also driving a surge in demand for new construction homes. While existing home sales fell in September, newly built home sales surged more than 12% (Reuters).

Adaptive Strategies Fueling Homebuilders' Success

Homebuilders have flexibly adapted to low inventory and high mortgage rates. They've downsized floor plans to offer more affordable options, implemented interest rate buy-downs, and introduced other incentives. Although this led to a marginal dip in revenue for some, the increased sales volume and revenue outperformance indicate that these strategic shifts are paying dividends.

How Bulls Can Trade the Dip

With sentiment at its lowest point all year (Reuters), traders have a potential opportunity for a contrarian play ahead of upcoming earnings announcements and other opportunities throughout November and December. One way to attempt to magnify the performance of those bullish trades is with the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL).

This fund seeks 300% of the daily performance, before fees and expenses, of the Dow Jones U.S. Select Home Construction Index*. Composed of U.S. companies in the home construction industry, the index tracks the wider homebuilding sector including builders, suppliers and home improvement retailers among others. The current top 10 holdings in the index include:

INDEX TOP 10 HOLDINGS % (as of 9/30/2023)
D R Horton14.24
Lennar Corporation12.33
Sherwin WIlliams4.58
Home Depot4.48
Lowe's Companies Inc4.38
Toll Brothers3.52
Builders Firstsource2.76

Click here to see the fund’s full holdings. Holdings are subject to risk and change.

For traders, NAIL is a chance to use 3X leverage on a homebuilder-heavy index to turn bullish assumptions on homebuilder stocks into a leveraged market play. Losses are magnified just as much as gains when using a leveraged ETF so this ETF should be used carefully and should not be held for periods longer than a day. For traders who understand and account for that risk in their trading strategy, NAIL can help you attempt to make the most of your trades as you head into the fourth quarter.

*Definitions & Index Descriptions

An investor should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. The Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain the Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at The Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

The Dow Jones U.S. Select Home Construction Index (DJSHMBT) measures U.S companies in the home construction sector that provide a wide range of products and services related to homebuilding, including home construction and producers, sellers and suppliers of building materials, furnishings and fixtures and also home improvement retailers. The Index may include large-, mid- or small-capitalization companies. One cannot directly invest in an index.

The Dow Jones U.S. Select Home Construction Index is a product of S&P Dow Jones Indices LLC ("SPDJI"), and has been licensed for use by Rafferty Asset Management, LLC ("Rafferty"). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones U.S. Select Home Construction Index.

Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and include risks associated with the Fund concentrating its investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause its price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to the securities of the Homebuilding Industry and Industrials and Consumer Discretionary Sectors. The homebuilding industry includes home builders (including manufacturers of mobile and prefabricated homes), as well as producers, sellers and suppliers of building materials, furnishings and fixtures. Companies within the industry may be significantly affected by the national, regional and local real estate markets, changes in government spending, zoning laws, interest rates and commodity prices. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.

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