The streak of weak U.S. housing data has started to make investors jittery. The homebuilders have been increasingly grappling with soaring softwood lumber prices and other material and labor costs.  Moreover, the severe winter chills in the south-central region of the United States in mid-February have added to the woes.

Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development data, new home sales were down 18.2% in February to a seasonally-adjusted annual rate of 775,000 units. This compares unfavorably with January’s revised sales of 948,000 units. Moreover, the metric lagged economists’ forecast of a 6.5% plunge to 875,000 units in February, per a Reuters poll. New home sales rose 8.2% in February year over year, gaining from a limited inventory of previously owned homes. Notably, new home sales are considered a leading housing market indicator since it is counted at the signing of a contract, per a Reuters article.

New home sales declined in all four regions last month. Notably, there was a 5.3% year-over-year rise in median new house price to $349,400 in February, per a Reuters article. Also, the number of new homes on market in February rose to 312,000 from 304,000 in January.

Current U.S. Housing Market Scenario

Rising softwood lumber prices, material and labor costs continue to be a major hurdle for the homebuilders. Going by Labor Department data, softwood lumber prices surged 79.7% on a year-over-year basis in February, as mentioned in a Reuters article. 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.

Also, low employment levels and rising new coronavirus cases might 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 to 3.09% (a nine-month high level), per a Reuters article.

The housing market has steadily benefited 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.

Going on, 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 compared 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 improving confidence.

Also, 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.

Commenting on the present housing market scenario, Doug Duncan, chief economist at Fannie Mae in Washington has said that “rising mortgage rates will likely soften homebuyer demand modestly, while homebuilder constraints, including the ongoing high prices of lumber and other materials, will likely dampen the supply of new homes. However, underlying demand remains strong. The extremely tight supply of existing homes for sale may encourage more homebuyers to turn to new home purchases,” as stated in a Reuters article.

Homebuilder ETFs That Might 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 $2.43 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 $1.61 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 31 stocks, each accounting for less than a 5.49% share. It has amassed assets worth $233.7 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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