Back to top

Image: Bigstock

Will ETFs Suffer as US Homebuilder Confidence Drops?

Read MoreHide Full Article

The U.S. housing sector has impressed investors with encouraging performance amid the tough pandemic times. However, builder confidence for newly built single-family homes pulled back from record-high levels in December. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes came in at 86 in December in comparison to 90 points in November, 85 points in October, 83 points in September and 30 in April (the lowest since June 2012). However, the reading still stands as the second-highest in the history of the index. Any reading above 50 is considered positive and signals at improving confidence.

Notably, all three components of the index dropped in December. The current sales conditions came in at 92 in December after declining four points. The metric measuring traffic of prospective buyers also witnessed a four-point drop to 73. Meanwhile, sales expectations for the next six months declined four points to 85, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined a point to 82. Moreover, the South index climbed a point to 87. Also, the Western index jumped two points to 96, with the Midwest scaling up a point to 81, per the release.

NAHB Chairman, Chuck Fowke, reportedly commented “housing demand is strong entering 2021, however the coming year will see housing affordability challenges as inventory remains low and construction costs are rising. Policymakers should take note to avoid increasing regulatory costs associated with land development and residential construction,” per the press release.

Limited Inventory Hurdle Persists

The U.S. housing market has been consistently battling with the limited inventory conditions, largely due to land shortages, skilled labor deficiencies along with rising material costs. All these factors are affecting the affordability as prices for existing and new homes are soaring.

Another looming concern is the chances of rising interest rates, which will once again hit affordability of the housing market. Introduction of coronavirus vaccine and another round of fiscal can aid in improving economic growth, which can result in increasing interest rates.

Commenting on the housing market, NAHB Chief Economist Robert Dietz has reportedly said that “the issues that have limited housing supply in recent years, including land and material availability and a persistent skilled labor shortage, will continue to place upward pressure on construction costs. As the economy improves with the deployment of a COVID-19 vaccine, interest rates will increase in 2021, further challenging housing affordability in the face of strong demand for single-family homes.”

Is Housing Sector Still a Bright Spot?

Low interest rates are boosting demand in the housing market. Per the Mortgage Bankers Association, the average rate on the 30-year fixed mortgage decreased to another record-low last week (the 15th record low seen so far this year), per a CNBC article. In fact, mortgage applications to buy a home rose 2% last week and 26% year over year (per the same CNBC article).

The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties. Notably, people are shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources.

Homebuilder ETFs That May Keep Gaining

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

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

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.02 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: 6 Secret Santa ETFs to Add Cheer to Your Portfolio).

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

A popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $1.31 billion. The fund charges 35 bps in annual fees (read: Will Housing ETFs Take a Pause as New Home Sales Decline?).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.25% share. It amassed assets worth $167.5 million. The expense ratio is 0.59% (read: all the Materials ETFs here).

Hoya Capital Housing ETF (HOMZ - Free Report)

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the US Housing Industry. It has AUM of $41 million. The fund charges 30 bps in annual fees (read: ETFs & Stocks to Ride on a Booming Housing Market).

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.  Get it free >>


In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


SPDR-SP HOMEBLD (XHB) - free report >>

ISHARS-US HO CO (ITB) - free report >>

INVS-DYN BLDG (PKB) - free report >>

HOYA CAP HOUSNG (HOMZ) - free report >>