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Will Housing ETFs Gain as US Homebuilder Confidence Rises?

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The U.S. housing sector has largely supported the economy by mostly staying resilient to the coronavirus outbreak amid a low-interest rate environment. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at 84 in February in comparison to 83 points in January, 86 in December, 90 in November and 30 in April (the lowest since June 2012). The metric also surpassed economists’ median forecast of 83, per a Bloomberg’s poll. Any reading above 50 is considered positive and signals at improving confidence.

Notably, the current sales conditions index remained steady at 90 in February. The metric measuring traffic of prospective buyers witnessed a four-point increase to 72. Meanwhile, sales expectations for the next six months dropped three points to 80, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast increased two points to 78. Meanwhile, the South Index slipped two points to 84. Also, the Western Index lost a couple of points to 93. Moreover, the Midwest slid a point to 81, per the release.

Going by the press release, NAHB chief economist Robert Dietz, reportedly commented, “demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets, but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks. Some builders are at capacity and may not be able to expand production due to these headwinds.”

Rising Lumber Prices a Challenge

Increasing lumber prices, material and labor costs can result in sluggishness in the housing market despite low interest rates. Going by Labor Department data, softwood lumber prices rose 73% on a year-over-year basis in January, as mentioned in a Reuters article. Also, low employment levels and an aggravating coronavirus outbreak may impede momentum of the U.S. housing market.

Going on, the U.S. housing market continues to battle against restrained inventory conditions that are delaying the delivery times, largely due to land shortages, skilled labor deficiencies along with rising material costs. All these factors are affecting affordability as prices for the existing and new homes are soaring.

Commenting on the housing market, NAHB chairman Chuck Fowke, reportedly said that “lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows. Builders remain very focused on regulatory and other policy issues that could price out households seeking new homes in a tight market this year”.

Will Housing Market Lose Momentum?

The 30-year mortgage rates, which have averaged less than 3% since the end of July, have been boosting demand in the residential real estate market, per a Bloomberg 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, individuals 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 to Watch Out for

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 an AUM of $2.23 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: Buy the Dip in These ETFs).

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 an AUM of $1.36 billion. The fund charges 35 bps in annual fees (read: Housing ETFs to Play D.R. Horton Q1 Earnings Beat & Fed Help).

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

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.34% share. It has amassed assets worth $215.9 million. The expense ratio is 0.59% (read: Infrastructure ETFs & Stocks Up for a Rally in Biden Era).

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 U.S. housing Industry. It has an AUM of $58.6 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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