The latest housing data reflects some sluggishness in the space, largely due to the severe winter chills in the south-central region of the United States in mid-February. It also highlights the growing struggle of homebuilders with respect to soaring softwood lumber prices and other material and labor costs. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts slid 10.3% to a seasonally-adjusted annual rate of 1.421 million units in February. The reading lagged analysts’ expectations of 1.560 million units, per a Reuters’ poll. Notably, housing starts declined 9.3% on a year-over-year basis.

Building permits, a construction pointer for the coming months, decreased 10.8% month over month to a rate of 1.682 million units in the month.

There was an 8.5% plunge in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.040 million units in February. However, permits to construct single-family homes declined 10% to 1.143 million units in the period, per the sources.

Meanwhile, housing starts for the multi-family housing segment came in at 372,000 units last month. Moreover, permits stood at 495,000 units in February for building multi-family homes.

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. However, it seems the space is now facing the brunt of rising lumber prices.

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. Also, low employment levels and a coronavirus outbreak may impede momentum of the U.S. housing market.

Commenting on the housing market, National Association of Home Builders (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.

Notably, per the monthly National Association of Home Builders/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.

Homebuilder ETFs That May Suffer

Against 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 Quick QuoteITB - 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 $2.50 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 Quick QuoteXHB - 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 $1.71 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 Quick QuotePKB - Free Report)  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 32 stocks, each accounting for less than a 5.30% share. It has amassed assets worth $233.3 million. The expense ratio is 0.59% (read: Infrastructure ETFs & Stocks Up for a Rally in Biden Era).

Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - 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 $57.8 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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