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Will Housing ETFs Suffer as US Homebuilder Confidence Weakens?

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The latest U.S. housing sector data highlights the growing struggle of homebuilders with respect to soaring softwood lumber prices and other material and labor costs. 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 82 for March in comparison to 84 in February, 83 points in January, 90 in November and 30 in April (the lowest since June 2012). However, the reading still looks strong. Any reading above 50 is considered positive and signals at improving confidence.

Notably, the current sales conditions index declined three points to 87 in March. The metric measuring traffic of prospective buyers stayed steady at 72. Meanwhile, sales expectations for the next six months rose three points to 83, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast increased two points to 80. Meanwhile, the South Index slipped two points to 82. Also, the Western Index lost three points to 90. Moreover, the Midwest slid a point to 80, per the release.

Going by the press release, NAHB chief economist Robert Dietz, reportedly commented, “builder confidence peaked at a level of 90 last November and has trended lower as supply-side and demand-side factors have trimmed housing affordability.”

Rising Lumber Prices Remain a Challenge

Increasing softwood lumber prices, material and labor costs are causing sluggishness in the housing market. The supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have also led to the rise in concrete, metal products, appliances, and other expenses, as mentioned in a FOX Business article. All these factors are affecting affordability as prices for existing and new homes are soaring.

Going by the FOX Business article, per the National Association of Homebuilders, increasing costs have led to the cancellation of new home contracts. Consequently, these factors are limiting the entry of some first-time homebuyers into the market as resale inventories are also declining, per the same article. Also, low employment levels and a coronavirus outbreak may impede momentum of the U.S. housing market.

If this was not enough, the U.S. housing market is now also grappling with rising mortgage rates. The 30-year fixed mortgage rate has increased by 30 basis points over the past month to 3.24% (a seven-month high level), per a FOX Business article.

Commenting on the housing market, NAHB chairman Chuck Fowke, reportedly said that “though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Supply shortages and high demand have caused lumber prices to jump more than 200% since last April. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

Meanwhile, the housing market has steadily benefitted from changing demographical preferences of a large chunk of population as people increasingly looked for work-from-home-friendly properties. Notably, individuals were 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 Suffer

In such a background, here are a few housing ETFs that might struggle due to the tough 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 $2.39 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: Guide to Homebuilding 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 $1.58 billion. The fund charges 35 bps in annual fees (read: ETFs & Stocks to Spring Higher in Key Home Selling Season).

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 a 5.19% share. It has amassed assets worth $235.6 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 represents the performance of the U.S. housing Industry. It has an AUM of $63.6 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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