NAIL ETF: some considerations

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Short-term market participants with an interest in the US housing market and the innate propensity and means to deal with leverage risks may consider looking at the Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL). The ETF follows a daily reset policy and seeks to provide 3x the “daily” return of the Dow Jones US Select Home Construction Index (note, not 3x the return over a specific period); this index covers a range of home building subsectors, including home builders, suppliers of building materials, furnishings and accessories, and home improvement retailers.

Housing Market Considerations

Zillow

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As recently mentioned in The Lead-Lag Report, within the broader US economy, the housing market has been a major beneficiary of the pandemic, seeing its value increase by trillions of dollars. With such monumental numbers floating around, interest in this segment is understandably very high, but calling out the ups and downs of the housing market has proven to be a tricky business over the years, and many people have gotten burned fingers doing so. I won’t attempt to do the same, rather I will lay out some of the broad outlines to be aware of before jumping into this segment.

The housing market has been strong for quite some time now, but at some point, the affordability quotient needs to be raised. As the Lead-Lag report points out, median home sales prices are approaching the 400,000 mark and are up almost 25% for the whole of last year.

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Builders

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It’s hard to see prices dropping anytime soon, and that’s mostly due to supply issues. Our research shows that the number of houses built per 1,000 people has been on a downward trend for some time now, and be warned, this is something quite common in advanced economies. One also has to wonder if homebuilders will be keen to clear up their backlog, especially at a time when lumber prices rose nearly 30% in February and home building materials are up 19% since December. 2020. Note that homebuilder confidence had fallen last time. month for the first time in four months.

It’s hard enough to get into home ownership in a prolonged environment of loose monetary conditions. With the Fed poised to swing into a hawkish interest rate regime, you have to wonder if potential home buyers will now be priced out. Of course, the fed funds rate and the 30-year mortgage rate are not directly correlated, but they tend to move in the same direction. The most recent 30-year mortgage rate is closer to 3.75% now versus 3% just a few months ago. A 75 basis point increase in mortgage rates on a $300,000 loan results in an increase in monthly payments of $200. Think about how this could burn a hole in the pocket of the average American, especially considering that various stimulus packages have been unwound and the personal savings rate is now well within normalized levels. to one digit.

Employment benefits

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Data from the Mortgage Bankers Association suggests momentum has been slowing for some time now, with overall mortgage demand down 40% from a year ago.

Mortgage application

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Perhaps these costly financing conditions could help normalize the imbalance between supply and demand; as buyers choose to stay away, this would put less pressure on supply to meet inventory needs, driving prices down.

Real estate investors

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There is another ever-growing dimension that one must consider when visualizing the housing market; it’s the growing influence of real estate investors here. As The Lead-Lag Report points out, this cohort of buyers currently accounts for nearly 20% of all homes purchased. This is a segment of the market where sentiment tends to be quite fickle and in the blink of an eye funds can be withdrawn adding to any underlying pressure that is brewing. In previous housing market booms this was less of an issue, now it’s not something you can just put aside.

Conclusion

With a product like NAIL, the impact of volatility plays a huge role in what you end up getting; in other words, it is a product that suffers when volatility increases, even if index returns are stable.

Without risk

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Even though we haven’t seen any risky or high volatility conditions yet, I think there’s a good chance it will happen in H2-21 when you have a nasty concoction of sharply rising fed funds rates , a slowing growth landscape, and lower inflation. For now, markets continue to price in a higher probability of even bigger quarter-point hikes by the Fed, and I fear the central bank is tightening things up too quickly, potentially triggering a deflationary volcano. . This would serve as the perfect landscape for volatility to return, like a phoenix.

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About Justin Howze

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