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Are ETFs in Trouble as US Homebuilder Confidence Drops in August?

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The U.S. housing sector continues to grapple with headwinds like increasing construction costs, constrained supplies along with rising home prices. These factors are taking a toll on builder confidence, which slipped to its lowest level since July 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 75 in August from 80 in July, 81 in June, 83 in May 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 five points to 81 in August. The metric, measuring traffic of prospective buyers, also saw a five-point drop to 60. Meanwhile, sales expectations for the next six months remained flat at 81, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined a point to 74. Also, the Western Index slipped a couple of points to 85. Moreover, the Midwest slid two points to 68, per the release. Also, the South Index dropped by three points to 82.

Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “While the demographics and interest for home buying remain solid, higher costs and material access issues have resulted in lower levels of home building and even put a hold on some new home sales. While these supply-side limitations are holding back the market, our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions.”

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, 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.

The increasing concerns about the surging coronavirus cases due to the delta variant continue to dampen U.S. consumer sentiments. The metric surprisingly slid to a pandemic-era low level in early August when compared to a reading of 70.8 recorded in April 2020. The University of Michigan’s preliminary consumer sentiment index fell to 70.2 in August from 81.2 last month. The metric also lagged market’s forecast of 81.2.

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, “Buyer traffic has fallen to its lowest reading since July 2020 as some prospective buyers are experiencing sticker shock due to higher construction costs. Policymakers need to find long-term solutions to supply-chain issues.”

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 $2.52 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 41 basis points (bps) in annual fees (read: Top ETF Stories of July).

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 $1.98 billion. The fund charges 35 bps in annual fees (read: Pain or Gain Ahead for Homebuilding ETFs?).

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 5.93% share. It has amassed assets worth $289.7 million. The expense ratio is 0.59% (read: Stocks & ETFs Winners From Senate's Nod for Infrastructure Bill).

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 $78.2 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).