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Are ETFs in Trouble as US Homebuilder Confidence Slips in July?

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The U.S. housing sector has disappointed once again with the release of latest data. Persistent headwinds of rising material prices along with supply chain and labor shortages continue to take a toll on builder confidence, which slipped to its lowest level since August 2020. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes declined to 80 in July from 81 in June, 83 in May, 82 in March and 30 in April (the lowest since June 2012). However, the reading looks strong as any number above 50 signals at improving confidence.

Notably, the current sales conditions index declined by a point to 86 in July. The metric, measuring traffic of prospective buyers, also saw a six-point drop to 65. Meanwhile, sales expectations for the next six months rose by two points to 81, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined four points to 75. Also, the Western Index slipped a couple of points to 87. Moreover, the Midwest slid a point to 71, per the release. Meanwhile, the South Index remained flat at 85.

Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “Builders are contending with shortages of building materials, buildable lots and skilled labor as well as a challenging regulatory environment. This is putting upward pressure on home prices and sidelining many prospective home buyers even as demand remains strong in a low-inventory environment.”

Notably, consumers seem to be disturbed about the rising prices of homes, vehicles and household durables. In fact, the buying attitudes for vehicles and homes contracted to their lowest level since 1982, per a Bloomberg report.

Current U.S. Housing Market Scenario

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. According to NAHB’s latest estimates, changes in prices for softwood lumber products that occurred between Apr 17, 2020 and Jul 8, 2021 have added $29,833 to an average new single-family home price. It also added $9,990 to the market value of an average new multifamily home.

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.

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 bumping up 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.

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.

Commenting on the current market conditions, NAHB Chairman Chuck Fowke has reportedly said that, "Builders continue to grapple with elevated building material prices and supply shortages, particularly the price of oriented strand board, which has skyrocketed more than 500 percent above its January 2020 level.”

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 $2.17 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: Consumer Price Sees Biggest Jump in 13 Years: ETFs to Gain).

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 $1.73 billion. The fund charges 35 bps in annual fees (read: 5 Winning ETF Strategies for the Second Half).

Invesco Dynamic Building & Construction ETF (PKB - 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 5.83% share. It has amassed assets worth $278.3 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 $74.4 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).