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What Awaits Housing ETFs as US Existing Home Sales Disappoint?

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The latest existing home sales data looks disappointing again. Per the National Association of Realtors (NAR) report, there was a 2.7% month-over-month drop in existing homes sales to a seasonally-adjusted annual rate of 5.85 million units in April. This marked the third consecutive monthly decline in the metric. Meanwhile, existing home sales rose 33.9% year over year.

First-time buyers accounted for 31% of sales in April, declining from 32% in March and 36% in the year-ago period. Existing homes sales increased in the Midwest by 0.8% month over month in April. Meanwhile, sales in the Northeast, South and West declined a respective 3.9%, 3.7% and 3.1% from March’s figure.

Commenting on the housing market scenario, Lawrence Yun, NAR’s chief economist, reportedly said, “home sales were down again in April from the prior month, as housing supply continues to fall short of demand. We'll see more inventory come to the market later this year as further COVID-19 vaccinations are administered and potential home sellers become more comfortable listing and showing their homes. The falling number of homeowners in mortgage forbearance will also bring about more inventory.”

Moreover, the median existing-home price for all housing types was $341,600, up 19.1% year over year in April, marking the 110th consecutive month of year-over-year gains.

How is the U.S. Housing Market Positioned?

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.

Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. In fact, there has been a more than 300% rise in lumber prices from April 2020. Moreover, costs of other materials like steel, concrete and gypsum products are rising at a record pace, per official NAHB data. According to a Reuters article, lumber prices increased 89.7% on a year-on-year basis in April. Going by the same article, tariffs on steel imports have imposed the burden of soaring costs on builders.

Also, supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have led to the rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article. These factors are affecting affordability as prices of existing and new homes are soaring.

Meanwhile, 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.

Thus, commenting on the market conditions, NAR President Charlie Oppler has reportedly said that "The demand for homeownership in America is as strong as it's ever been, and NAR continues working with policymakers across the country to find solutions to the issues we face in our industry. Ultimately, though, buyers still recognize that securing a home is one of the best ways to build long-term wealth, and Realtors continue their work to make that dream a reality for families everywhere."

Housing ETFs That Might Suffer

Against such a backdrop, 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 AUM of $3.18 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: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

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 AUM of $2.31 billion. The fund charges 35 bps in annual fees (read: 5 ETFs That Skyrocketed During Biden's 100 Days in Office).

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 5.45% share. It has amassed assets worth $307.2 million. The expense ratio is 0.59% (read: Looking for Earnings Surprise? 6 Sector ETFs to Play).

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 AUM of $73.2 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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