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The housing market, which has been booming over the past year, has started to see signs of cooling down. This is especially true as new home sales dropped 18.2% in February and existing homes sales fell 6.6% from January.
The National Association of Home Builders/Wells Fargo Housing Market Index showed that the builder sentiment for newly-built, single-family homes dropped to 82 for March from 84 in February, 83 in January, and 90 in November but well-off compared to the lowest level of 30 since June 2012 seen in April last year (read: What's in Store for Housing ETFs as US New Home Sales Fall?).
The drop stemmed from surging raw material prices for commodities like lumber and wood, increasing construction costs and rising mortgage rates. Lumber has never been more expensive and is currently more than twice the price for this time of the year. According to the National Association of Home Builders, lumber costs have spiked 180% since last April, increasing the cost of building an average single-family home by $24,000.
Crude oil, a starting point for paint, drain pipe, roof shingles and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout houses, costs about a third more than it did in autumn. Prices for granite, insulation, concrete blocks and common brick have all shot up to new records in 2021, according to the Bureau of Labor Statistic’s producer-price index Drywall and ceramic tiles also climbed but are well below the record prices.
Meanwhile, mortgage rates have started to climb from the rock-bottom levels in tandem with U.S. Treasury yields. According to Freddie Mac, the average 30-year fixed mortgage rate rose to nine-month high of 3.17% as of Mar 25, up from 3.09% a week ago, 2.65% at the start of the year and 3.5% a year ago. Though the sustained rise in mortgage rate in recent months is making home ownership more expensive for first-time buyers, the rate is still below the year-ago level of 3.65%. This will continue to encourage people to buy more homes as it has made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy.
As such, demand for homes will remain robust while higher prices of lumber and other materials will likely dampen the supply of new homes, leading to a spike in home prices. Further, new home sales increased 8.2% from February last year and existing homes sales were also up 9.1% year over year, suggesting robust times for the homebuilding industry (read: Guide to Homebuilding ETFs).
Further, the still stay-at-home culture due to the pandemic has resulted in high demand for big homes, as buyers now want specific spaces for working, schooling and exercising at home. The post-pandemic world has led to a demographic shift with millennials being the largest emerging homebuyers. According to the source, about 79% of millennials are first-time buyers.
Moreover, homebuilders are currently well placed, belonging to a top-ranked Zacks industry (placed at the top 14% of 250+ industries), suggesting a solid outlook (see: all the Industrial ETFs here).
Given this, investors could bet on the space with these homebuilder ETFs having a Zacks ETF (Hold) Rank:
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 $2.4 billion, it holds a basket of 46 stocks with a heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 3.2 million shares a day on average. It has surged 12% in a month (read: ETFs & Stocks to Spring Higher in Key Home Selling Season).
This ETF provides exposure to homebuilders with a well-diversified exposure across building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is the most-popular option in the homebuilding space with AUM of $1.5 billion and an average daily volume of 2.2 million shares. The product charges 35 bps in annual fees and has gained 11.9% so far this year.
Invesco Dynamic Building & Construction ETF (PKB - Free Report)
This fund follows the Dynamic Building & Construction Intellidex Index, holding 32 well-diversified stocks in its basket. It has amassed assets worth $229.5 million and sees a lower volume of roughly 46,000 shares per day on average. Expense ratio comes in at 0.59%. PKB is up 6.7% in a month (read: Construction ETF Hits a New 52-Week High).
This ETF invests in 100 domestic companies involved in the housing industry, including residential REITs, homebuilders, home improvement companies, and real estate services and technology firms by tracking the Hoya Capital Housing 100 Index. It has accumulated $56.9 million in its asset base and charges 30 bps in annual fees. The product trades in an average daily volume of 12,000 shares and has added 6.3% in a month.
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Homebuilding ETFs Standing Tall Amid Rising Costs
The housing market, which has been booming over the past year, has started to see signs of cooling down. This is especially true as new home sales dropped 18.2% in February and existing homes sales fell 6.6% from January.
The National Association of Home Builders/Wells Fargo Housing Market Index showed that the builder sentiment for newly-built, single-family homes dropped to 82 for March from 84 in February, 83 in January, and 90 in November but well-off compared to the lowest level of 30 since June 2012 seen in April last year (read: What's in Store for Housing ETFs as US New Home Sales Fall?).
The drop stemmed from surging raw material prices for commodities like lumber and wood, increasing construction costs and rising mortgage rates. Lumber has never been more expensive and is currently more than twice the price for this time of the year. According to the National Association of Home Builders, lumber costs have spiked 180% since last April, increasing the cost of building an average single-family home by $24,000.
Crude oil, a starting point for paint, drain pipe, roof shingles and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout houses, costs about a third more than it did in autumn. Prices for granite, insulation, concrete blocks and common brick have all shot up to new records in 2021, according to the Bureau of Labor Statistic’s producer-price index Drywall and ceramic tiles also climbed but are well below the record prices.
Meanwhile, mortgage rates have started to climb from the rock-bottom levels in tandem with U.S. Treasury yields. According to Freddie Mac, the average 30-year fixed mortgage rate rose to nine-month high of 3.17% as of Mar 25, up from 3.09% a week ago, 2.65% at the start of the year and 3.5% a year ago. Though the sustained rise in mortgage rate in recent months is making home ownership more expensive for first-time buyers, the rate is still below the year-ago level of 3.65%. This will continue to encourage people to buy more homes as it has made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy.
As such, demand for homes will remain robust while higher prices of lumber and other materials will likely dampen the supply of new homes, leading to a spike in home prices. Further, new home sales increased 8.2% from February last year and existing homes sales were also up 9.1% year over year, suggesting robust times for the homebuilding industry (read: Guide to Homebuilding ETFs).
Further, the still stay-at-home culture due to the pandemic has resulted in high demand for big homes, as buyers now want specific spaces for working, schooling and exercising at home. The post-pandemic world has led to a demographic shift with millennials being the largest emerging homebuyers. According to the source, about 79% of millennials are first-time buyers.
Moreover, homebuilders are currently well placed, belonging to a top-ranked Zacks industry (placed at the top 14% of 250+ industries), suggesting a solid outlook (see: all the Industrial ETFs here).
Given this, investors could bet on the space with these homebuilder ETFs having a Zacks ETF (Hold) Rank:
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 $2.4 billion, it holds a basket of 46 stocks with a heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 3.2 million shares a day on average. It has surged 12% in a month (read: ETFs & Stocks to Spring Higher in Key Home Selling Season).
SPDR S&P Homebuilders ETF (XHB - Free Report)
This ETF provides exposure to homebuilders with a well-diversified exposure across building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is the most-popular option in the homebuilding space with AUM of $1.5 billion and an average daily volume of 2.2 million shares. The product charges 35 bps in annual fees and has gained 11.9% so far this year.
Invesco Dynamic Building & Construction ETF (PKB - Free Report)
This fund follows the Dynamic Building & Construction Intellidex Index, holding 32 well-diversified stocks in its basket. It has amassed assets worth $229.5 million and sees a lower volume of roughly 46,000 shares per day on average. Expense ratio comes in at 0.59%. PKB is up 6.7% in a month (read: Construction ETF Hits a New 52-Week High).
Hoya Capital Housing ETF (HOMZ - Free Report)
This ETF invests in 100 domestic companies involved in the housing industry, including residential REITs, homebuilders, home improvement companies, and real estate services and technology firms by tracking the Hoya Capital Housing 100 Index. It has accumulated $56.9 million in its asset base and charges 30 bps in annual fees. The product trades in an average daily volume of 12,000 shares and has added 6.3% in a month.
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 >>