The U.S. housing sector is likely to take a beating due to surging mortgage rates and decreasing affordability of houses, which are pushing first-time buyers outside the market place. The Fed has been hawkish and will likely turn tougher in the coming days to tame inflation. This would push up mortgage rates, which is unappealing for investors.

Decline in Mortgage Demand

Surging interest rates pushed mortgage demand down more than 40% from a year ago. Refinance demand was 62% lower than the same week one year ago. Applications to refinance a home loan, which have been falling steadily for months, dropped another 10% week to week, per the CNBC article.

“As higher rates reduce the incentive to refinance, application volume dropped to its lowest level since the spring of 2019,” per an MBA economist, as quoted on CNBC. Total mortgage application volume dropped another 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index, the article indicated.

"Monthly payments on mortgages have risen by 28% from one year ago - which interestingly is not a part of the consumer price index - and the market remains swift with multiple offers still being recorded on most properties", said Lawrence Yun, NAR's chief economist, as quoted on CNBC.

Will Decline in Sales & Spike in Inventory Limit Pricing Power?

No wonder, existing home sales in the United States dropped 7% sequentially to a seasonally adjusted annualized rate of 6.02 million in February of 2022, below market forecasts of 6.1 million. It marked the lowest reading in six months.

The inventory of unsold existing homes slightly rose to 870,000, equivalent to 1.7 months of supply at the current monthly sales pace. Although the median sales price rose to $357,300, up 15% year over year, a continued decline in mortgage demand may put pressure on the price rise amid rising costs. In any case, pricing actions by homebuilders are registering the longest-running streak on record. Any further decline in demand for a few months in a row may restrict the pricing power of homebuilders.

Rise in Construction Costs

Material prices have been on the rise lately, thereby resulting in higher construction costs. Affordability will be an issue in 2022 amid rising costs and interest rates. Homebuilder sentiment in the United States fell to the lowest level in six months.

ETFs in Focus 

Against this backdrop, below we highlight a few ETFs that should be watched in the coming days. These ETFs are iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) , SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) and The Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - Free Report) . ITB has declined more than 10% past month while XHB has lost 9%. HOMZ is better-positioned with a 4.7% decline at the time of writing (as of Apr 6, 2022).