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Housing Market Facing Strong Headwinds: ETFs in Focus

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Rising interest rates are taking a toll on the housing market as total mortgage applications hit a near 4-year low last week (ended Nov 2), per Mortgage Bankers Association. These applications were down 16% from a year ago. Mortgage applications to purchase a home were 5% lower-- marking a two-year low. Mortgage applications for refinancing a home loan, which have been dipping for more than a year, fell another 3% by Nov 2 (see: all the Industrials ETFs).

Tightening of the monetary policy by the Fed is proving to be a significant headwind for the sector. The Fed already has hiked rates thrice this year and another one is expected in December. Average contract interest rate for a 30-year fixed rate mortgage increased 4 basis points to 5.15% (as on Nov 2) -- hitting an eight-year high, for confirming loan balances worth $453100 or lower  (read: 5 Sector ETFs to Sizzle on Upbeat October Jobs Data).

Rising mortgage rates and higher prices for homes are affecting the country’s housing market as sales for new single U.S. family homes fell to a near two-year low in September. Per Commerce Department, sales for the month ending September came in at 553,000 on a seasonally adjusted basis — being 5.5% lower than the downwardly revised August rate of 585,000 as well as 13.2% down from the same period a year ago. New home sales have declined for four straight months now.

Housing sentiment has been falling for the past several months, falling to its lowest in a year per a recent monthly survey by Fannie Mae. As per the survey, which recorded its second-lowest reading in its history, consumer attitude toward buying and selling were less optimistic.

Case-Shiller home price index, which is widely followed statistic to gauge the strength of the existing home market, came out with a report on Oct 30 for the month of August. Per index, U.S. home prices momentum is nothing to be too excited about as prices have increased less than 6% (at 5.8%) in the last 12 months. Half of the 20 cities covered by the index witnessed an increasing pricing momentum while the other half saw a declining price momentum.

Homebuilder ETFs have been performing poorly this year with iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Homebuilders ETF (XHB - Free Report) and Invesco Dynamic Building & Construction ETF (PKB - Free Report) losing 25.8%, 19.4% and 20%, respectively, year to date. Below we highlight these ETFs (read: Industrial ETFs in Focus Post Q3 Earnings):

ITB

This fund tracks the Dow Jones U.S. Select Home Construction Index comprising companies building residential homes, including manufacturers of mobile and prefabricated homes. There are a total of 47 holdings in the basket, with D.R. Horton Inc (DHI - Free Report) occupying the top weight of 13.88%. The fund’s AUM is $913.9 million and expense ratio is 0.43%.

XHB

This fund tracks the S&P Homebuilders Select Industry Index targeting industries like building products, home furnishings, home improvement retail, home furnishing retail and household appliances. It is an equal-weighted fund. It comprises 35 holdings and Whirlpool Corporation (WHR - Free Report) occupies the top position with 4.9% weight. The fund’s AUM is $687.1 million and expense ratio is 0.35%.

PKB

This fund tacks the Dynamic Building & Construction Intellidex Index targeting companies 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. It comprises 30 holdings and Tractor Supply Co (TSCO - Free Report) (6.13%) is at the top. The fund’s AUM is $153.8 million and expense ratio is 0.58%.

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