Homebuilder ETFs Hit a Wall

Exchange traded funds that invest in homebuilders have lost momentum in the past month, a sign the stock-market rally might be running out of steam.

Improved prospects for financial stocks, homebuilders and other beaten-down sectors have been pushing up shares in recent weeks. In the month through May 21, the iShares Dow Jones U.S. Home Construction Fund(ITB Quote) fell 4.7% and the SPDR S&P Homebuilders ETF(XHB Quote) slid 7.7%, compared with a 5.3% gain for the S&P 500 Index. The PowerShares Dynamic Building & Construction Portfolio(PKB Quote) gained 1.9%, but is showing signs of deterioration.

The industry has made a few notable improvements recently. Toll Brothers(TOL Quote) and Ryland Group(RYL Quote), holdings in the iShares and SPDR funds, have raised much-needed capital in the past month. The boost follows a weak second quarter for Toll Brothers, which said revenue fell 51% after selling 47% fewer homes than a year ago. However, there was also some optimism in the numbers: Toll Brothers' 22% cancellation rate was down from 37% a year ago.

Until the numbers turn positive, revenue and earnings are headed lower, but a final bottom for the housing market is a long way off. Rising unemployment will lead to more foreclosures, and layoff fears are already sapping the market. Last Thursday, Nishu Sood, an analyst at Deutsche Bank(DB Quote), said the percentage of renters buying homes is at an all-time low.

Freidman, Billings, Ramsey Group(FBR Quote) analysts offered a different angle on the sector in a research note last Thursday. They said home-improvement stocks such as Lowe's(LOW Quote) might benefit from foreclosures because many of these homes will need repairs and renovations. An economy that favors home improvement over homebuilding would be a plus for the PowerShares fund, which invests less than 10% of its assets in builders.