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Is the Rally in Homebuilding ETFs Over?

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The U.S. housing market was hit hard initially amid the coronavirus-led lockdown in 2020. In any case, the space was struggling with land and labor shortage as well as higher prices. The COVID-19 outbreak made matters worse. However, things looked up greatly later on as mortgage financing bounced back amid record-low rates helped by the Fed’s ultra-easy monetary policy. Home sales jumped materially last year.

Homebuilding fund iShares U.S. Home Construction ETF (ITB - Free Report) is up 22% this year and has gained 62.4% past year. This is in comparison to 13.6% YTD gains and 41.8% one-year gains in the S&P 500.  However, things have taken a turn for the worse in the past one month as ITB has lost 5.4% while the S&P 500 is up 1.6%.

Builder Sentiment Drops

Builder sentiment in June dropped to its lowest level since August, as construction costs pushed up new home prices, keeping buyers at the sidelines and making it harder for some small builders, those who comprise two-thirds of the homebuilding market, to get access to loans, as quoted on CNBC.

The National Association of Home Builders/Wells Fargo Housing Market Index dropped 2 points to 81, down from a recent record peak of 90 last November. Anything above 50 is still considered positive.Of the sentiment index’s three components, current sales conditions declined 2 points to 86. Sales expectations in the next six months fell 2 points to 79, and buyer traffic also went southward by 2 points to 71.

Concerns in the Sector

“Higher costs and declining availability for softwood lumber and other building materials pushed down builder sentiment in June,” said NAHB Chairman Chuck Fowke, as quoted on CNBC. Lumber prices have more than tripled over the past year, thanks mainly to strong demand from the housing sector.

Post-pandemic “Suburban Revival,” record-low mortgage rates and a frenzy of home renovations led to the uptick in the lumber prices. Although sawmills have boosted production significantly to cater to the higher demand, it still remains about 16% below the 2006 peak (read: ETFs to Benefit from Soaring Lumber Prices).

While lumber prices are lower by about 10% from their recent peak, they are still about 300% higher than the 15-year average. Not only lumber, other raw material costs are also flaring up due to rising inflation and supply-chain issues owing to lockdowns in many parts of the world. As a result, the median price of a new home in April was up 20% year over year.  

Plus, talks of rising rates are doing rounds. Most recently, there were talks a few days back that the Fed will enact at least two rate hikes by the end of 2023. Mortgage rates jumped back to the above 3% level. Analysts believe that the rates are likely to go higher in line with economic improvement and rising inflation. So, days of dirt-cheap mortgage rates could be soon be over.

ETFs in Focus

Against this backdrop, below we highlight a few ETFs that should be watched in the coming days. These ETFs are ITB, SPDR S&P Homebuilders ETF (XHB - Free Report) and Invesco Dynamic Building & Construction ETF (PKB - Free Report) and Hoya Capital Housing ETF (HOMZ - Free Report) .

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