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Will ETFs Suffer on Disappointing US Housing Starts in April?

·5 min read

The latest data highlights the growing struggle of homebuilders with respect to soaring softwood lumber prices and other material and labor costs which continue to dampen the prospects of the sector. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts declined 9.5%  to a seasonally-adjusted annual rate of 1.569 million units in April after jumping to nearly a 15-year high level in March. The reading lagged analysts’ expectations of 1.710 million units, per a Reuters’ poll. However, housing starts jumped 67.3% on a year-over-year basis.

Building permits, a construction pointer for the coming months, increased 0.3% month over month to a rate of 1.760 million units last month. The metric was up 60.9% on a year-over-year basis.

There was a 13.4% fall in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.087 million units in April. Moreover, permits to construct single-family homes slid 3.8% to 1.149 million units in the period, per the sources.

Going on, housing starts for the multi-family housing segment rose 0.8% to 482,000 units last month. Meanwhile, permits increased 8.9% to a pace of 611,000 units in April for building multi-family homes.

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. However, it seems the space is now facing the brunt of rising lumber prices.

Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. In fact, there has been a more than 300% rise in lumber prices from April 2020. Moreover, costs of other materials like steel, concrete and gypsum products are rising at a record pace, per official NAHB data. According to a Reuters article, lumber prices increased 89.7% on a year-on-year basis in April. Going by the same article, tariffs on steel imports have imposed the burden of soaring costs on builders.

Also, supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have led to the rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article. These factors are affecting affordability as prices of existing and new homes are soaring.

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 market conditions, Mike Fratantoni, chief economist at the Mortgage Bankers Association in Washington, has said, "Builders are delaying starting new construction because of the marked increase in costs for lumber and other inputs. These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates," per a Reuters article.

Homebuilder ETFs That Might Gain

Against such a backdrop, here are a few housing ETFs that might rise amid the current housing sector scenario:

iShares U.S. Home Construction ETF ITB

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 $3.18 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: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

SPDR S&P Homebuilders ETF XHB

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 $2.31 billion. The fund charges 35 bps in annual fees (read: 5 ETFs That Skyrocketed During Biden's 100 Days in Office).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than a 5.45% share. It has amassed assets worth $307.2 million. The expense ratio is 0.59% (read: Looking for Earnings Surprise? 6 Sector ETFs to Play).

Hoya Capital Housing ETF HOMZ

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 $73.2 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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SPDR-SP HOMEBLD (XHB): ETF Research Reports
 
ISHARS-US HO CO (ITB): ETF Research Reports
 
INVS-DYN BLDG (PKB): ETF Research Reports
 
HOYA CAP HOUSNG (HOMZ): ETF Research Reports
 
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