The U.S. homebuilding industry is in good shape, and still one of the pillars on which the economy rests. The 2017 outlook for homebuilding is quite compelling given historically low mortgage rates, impressive first-quarter 2017 existing home sale data and a tight inventory. Consistent job growth, healthy demand-supply balance and seemingly high homebuilders’ confidence are adding to the momentum.

What Numbers Have to Say

According to recently released existing home sales data by the National Association of Realtors, existing home sales increased 1.1% to a seasonally adjusted rate of 5.62 million units in May. Sales were 2.7% higher than the year-ago level, growing at the third-highest clip in the last one year. (Read: How to Build a Winning ETF Portfolio for Second-Half 2017)

Notably, in the first quarter of 2017, total existing home sales rose 1.4% from the preceding quarter, marking the highest increase in a decade. This was also 5% higher than the corresponding period last year.

Given the low inventory situation, the median existing-home price for all housing types in May was up 5.8% year over year, marking the 63rd straight month of year-over-year gains. It is important to note here that existing home sales make up a large part of all U.S. homebuilding activity relative to new home sales. (Read: Best & Worst ETFs of Q2)

Meanwhile, new home sales increased 2.9% month over month to a seasonally adjusted rate of 610,000 units in May, as per the latest report released by the Commerce Department. April's sales pace was also revised sharply higher to 593,000 units from 569,000 units. Sales of new single-family houses in May 2017 were 8.9% higher year over year.

The median house price increased to a record high of $345,800 in May from $310,200 in April thanks to robust demand. The average sales price of $406,400 in May was also a record high.

The housing market stands tall courtesy of continued strong job growth. The 2017 outlook for homebuilding is quite compelling, given historically low mortgage rates, healthy demand, consistent job growth and solid homebuilders’ confidence. Although homebuilders’ confidence dipped slightly in June, it’s still above 50, which is encouraging. Moreover, mortgage rates are near historic lows even after the Fed’s recent interest rate hike. Through May 2017, the U.S. economy added jobs for the 80th straight month. The unemployment rate was 4.3% in May, the lowest since 2001. (read more: Hot Housing ETFs to Buy Now)

Hang-Ups

Undeniably, the homebuilding industry saw the fastest quarterly home sales in a decade in the first quarter of 2017, and lent some much-needed support to the economy. The solid sales pace was especially appreciable considering higher prices and mortgage rates.

That said, a tight labor market, limited land availability, higher material costs and a constrained mortgage environment are restricting the ability of homebuilders to respond to growing demand. Despite concerns over the chance of a series of interest rate hikes by the Federal Reserve, optimism surrounding the housing market remains unruffled. Again, with demand outstripping supply, house prices remain elevated thereby threatening affordability.

Though homebuilders acknowledge the rise in labor shortage and land/labor cost, they in general expect the housing market to continue to recover this year in tandem with steady economic growth.

ETFs to Tap the Sector

Below we take a look at three construction ETFs that which are poised to gain from the upswing in the housing market. (See all industrials ETFs here)

SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report)

The fund employs a replication strategy in seeking to track the performance of the S&P Homebuilders Select Industry Index, which is an equal weighted index of the homebuilding segment of a U.S. total market composite index. The fund has an expense ratio – an annual fee – of 0.35%.

The top three sectors are Building Products (31.96%), Homebuilding (30.91%) and Home-furnishing (11.56%). The top three holdings are PulteGroup Inc. (4.64%), Toll Brothers Inc. (4.63%) and Johnson Controls International plc (4.57%). This fund holds 37 stocks with about 45.43% invested in the top 10 holdings.

iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report)

ITB tracks the Dow Jones U.S. Select Home Construction Index, which measures the performance of the U.S. home construction sector.

The top three holdings are DR Horton (11.8%), Lennar Corp. (10.87%) and NVR Inc. (8.56%). The fund is heavily exposed to the Homebuilding sector (65.32%), followed by Building Products (14.94%) and Home Improvement Retail (8.61%).

This fund holds 45 securities in its basket and has an expense ratio of 0.44%.

PowerShares Dynamic Building & Construction Fund (PKB Quick QuotePKB - Free Report)

PKB seeks to match the performance of Dynamic Building & Construction IntellidexSM Index, which is composed of U.S. building and construction companies. The top three sector allocations are Consumer Discretionary (38.49%), Industrials (37.96%) and Materials (18.35%). Yet, the fund is more expensive than many other options in the space, charging 63 basis points in annual fees.

Among the 30 stocks in the basket, Owens Corning, NVR Inc. and Lennar Corp., hold the top spots with 5.24%, 5.09% and 4.99%, respectively, of total net assets. 

To Sum Up

Investors’ sentiments could be dampened by the possibility of an interest rate hike. Again, skilled labor shortage is a cause of concern as demand continues to rise. Meanwhile, rising land and labor costs are restricting margins as these limit homebuilders’ pricing power.

However, there are plenty of reasons to be optimistic about the broader housing sector over both the short and the long terms. In this context, the above-mentioned ETFs might be sound bets to play the sector.

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