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Will Housing ETFs Suffer as US New Home Sales Dip in March?

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The U.S. housing sector is struggling with high construction costs, supply-chain disturbances and high mortgage rates that reduce affordability. Meanwhile, continuously shrinking inventories of previously owned homes have been providing some support to the space. The impact of these factors can be seen in U.S. new home sales, which declined for the third consecutive month in March.

Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development data, new home sales were down 8.6% in March to a seasonally-adjusted annual rate of 763,000 units. This compares unfavorably with February’s upwardly revised sales of 835,000 units from the previously reported 772,000 units.

Also, the metric lagged economists’ forecast of declining to 765,000 units in March, per a Reuters’ poll. New home sales declined 12.6% year over year last month. The same is considered a leading housing market indicator since it is counted when signing a contract, per a Reuters article.

New home sales declined in all four regions. Median new house price witnessed a 21.4% year-over-year rise to $436,700 in March, per a Reuters article. Also, the number of new homes in the market rose to 407,000 in March from 392,000 units in February.

Current U.S. Housing Market Scenario

The U.S. housing sector is consistently grappling with the rising softwood lumber, material and labor costs. Moreover, there was a sharp rise in plywood prices. Scarcity in copper supplies and tariffs on steel imports are bumping up building costs. These factors are affecting the affordability as prices of existing and new homes are soaring.

The rising costs and increasing interest rates will dampen the favorable demand scenario arising from low housing inventory and favorable demographics. Market participants expect the record-low housing supply levels to continue strengthening the homebuilding space in 2022 (per a Reuters article). In fact, the backlog of houses that have been granted permission for construction but are yet to begin rose 2.9% to an all-time high level of 280,000 units in March.

According to the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for the newly-built single-family homes slipped two points to 77 in April this year from 79 in March, 81 in February and 83 in January. The homebuilder sentiment declined for the fourth straight month and also slipped to its lowest level since last September. However, the reading looks strong as any number above 50 signals improving confidence.

Increasing home prices and interest rates are weighing on housing affordability. According to data from mortgage finance agency Freddie Mac, the 30-year fixed-rate mortgage averaged 5.11% during the week ending Apr 21 (the highest since April 2010), per a Reuters article.

In order to control hot inflation readings, the Federal Reserve approved a 0.25 percentage point rate hike (the first increase since December 2018) on Mar 16. Following the hike, the benchmark interest rates fall into a range of 0.25-0.5%.

Housing ETFs to Track

Against such a backdrop, here are a few housing ETFs that might feel the heat from the roughing up of the housing sector scenario:

iShares U.S. Home Construction ETF (ITB - Free Report)

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $1.47 billion, iShares U.S. Home Construction ETF holds a basket of 47 stocks, heavily focused on the top two firms. ITB charges 41 basis points (bps) as annual fees. iShares U.S. Home Construction ETF carries a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: 5 ETFs to Make the Most of Red-Hot 40-Year High Inflation).

SPDR S&P Homebuilders ETF (XHB - Free Report)

A popular choice in the homebuilding space, SPDR S&P Homebuilders ETF follows the S&P Homebuilders Select Industry Index. SPDR S&P Homebuilders ETF holds about 35 securities in its basket.

XHB has AUM of $1.21 billion. SPDR S&P Homebuilders ETF charges 35 bps of annual fees. SPDR S&P Homebuilders ETF carries a Zacks ETF Rank #2, with a High-risk outlook (read: Tough Time for Homebuilding ETFs Ahead?).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)  

Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than 5.7% share. The index comprises companies primarily engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines and airports.

Invesco Dynamic Building & Construction ETF amassed assets worth $154.5 million. The total expense ratio is 0.60%. Invesco Dynamic Building & Construction ETF carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: 6 Solid Sector ETFs to Buy Now).

Hoya Capital Housing ETF (HOMZ - Free Report)

Hoya Capital Housing ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the U.S. housing industry.

Hoya Capital Housing ETFhas AUM of $49.7 million. The fund charges 30 bps as annual fees. It carries a Zacks ETF Rank #2 (see all the Materials ETFs here).