The latest existing home sales data looks disappointing again. Per the National Association of Realtors (NAR) report, there was a 0.9% month-over-month drop in existing homes sales to a seasonally-adjusted annual rate of 5.80 million units in May. This marked the fourth consecutive monthly decline in the metric. Meanwhile, existing home sales rose 44.6% year over year.

First-time buyers accounted for 31% of sales in May, on par with April but comparing unfavorably with 34% in the year-ago period. Existing homes sales increased in the Midwest by 1.6% month over month in May. Meanwhile, sales in the Northeast, South and West declined a respective 1.4%, 0.4% and 4.1% from April’s figure.

Commenting on the housing market scenario, Lawrence Yun, NAR’s chief economist, reportedly said, "Home sales fell moderately in May and are now approaching pre-pandemic activity. Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”

Moreover, the median existing-home price for all housing types was $350,300 (an all-time high level), up 23.6% year over year in May, marking the 111th consecutive month of year-over-year gain since March 2012.

How is the U.S. Housing Market Positioned?

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. In fact, residential construction investment rose double digits since the third quarter of 2020, per a Reuters article. Moreover, market experts expect the housing sector to contribute modestly to gross domestic product growth in the second quarter.

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. The supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have also led to a rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article.

Notably, there was a 154.3% year-over-year rise in May in prices of softwood lumber, which is used for constructing frames and trusses of houses, per a Reuters article. Moreover, there was a sharp rise in prices of plywood. Going on, scarcity in supplies of copper along with tariffs on steel imports is also increasing building costs. Moreover, scarce supplies of semiconductors globally have resulted in shrinking supplies of some appliances, per a Reuters article.

These factors are affecting affordability as prices of existing and new homes are soaring. Notably, house prices soared the most in more than 15 years annually, increasing worries that some first-time buyers might be priced out of the market, as stated in a Reuters article.

Also, low employment levels might impede momentum of the U.S. housing market. Moreover, it is expected that the housing supplies crunch will remain as the number of homes authorized for construction but not yet begun increased to the highest level since 1999, per a Reuters article. This factor is also expected to increase housing price inflation for a while.

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.

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 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 AUM of $2.45 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 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 AUM of $1.97 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 Quick QuotePKB - Free Report)  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.54% share. It has amassed assets worth $286.2 million. The expense ratio is 0.59% (read: Looking for Earnings Surprise? 6 Sector ETFs to Play).

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 AUM of $72 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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