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Will ETFs Suffer as US Homebuilder Confidence Dips in June?

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The U.S. housing sector is grappling with surging mortgage rates and red-hot inflation levels. Moreover, mounting material costs amid supply-chain disruptions of lumber and building materials are several other factors affecting houses’ affordability and increasing their prices, thereby excluding the entry-level and first-time buyers from the market. Consequently, a fall in the homebuilder sentiment for the sixth straight month was witnessed in June. The metric has slipped to a two-year low level this month.

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 to 67 in June from 69 in May, 77 in April, 79 in March and 81 in February. However, the reading looks strong as any number above 50 signals improving confidence.

The disappointing data can weigh on ETFs like iShares U.S. Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB), Invesco Dynamic Building & Construction ETF (PKB) and Hoya Capital Housing ETF (HOMZ), which have high exposure to companies belonging to the housing space.

The current sales conditions index declined a point to 77 in June. The metric measuring traffic of prospective buyers saw a five-point fall to 48. Sales expectations for the next six months slipped two points to 61, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast slipped a point to 71. However, the South and Midwest Index declined two and six points, respectively, to 78 and 56. Moreover, the West lost nine points to 74, per the release.

Going by the press release, NAHB chairman Jerry Konter reportedly said, “Six consecutive monthly declines for the HMI is a clear sign of a slowing housing market in a high inflation, slow growth economic environment. The entry-level market has been particularly affected by declines for housing affordability and builders are adopting a more cautious stance as demand softens with higher mortgage rates. Government officials need to enact policies that will support the supply-side of the housing market as costs continue to climb.”

How’s the U.S. Housing Market Looking?

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

The rising costs and increasing interest rates will dampen the favorable demand scenario, led by low housing inventory and favorable demographics. Fed Chair Jerome Powell raised interest rates by 75 basis points (bps), pushing the federal funds rate between 1.5% and 1.75%, to subdue inflation through a tighter monetary policy. This marked the biggest interest-rate increase since 1994. To control hot inflation readings, the Fed hiked rates twice by 0.25% and 0.50% in 2022. The central bank plans to start reducing its balance sheet in June this year.

Commenting on the housing market conditions, NAHB chief economist Robert Dietz reportedly said, “The housing market faces both demand-side and supply-side challenges. Residential construction material costs are up 19% year-over-year with cost increases for a variety of building inputs, except for lumber, which has experienced recent declines due to a housing slowdown. On the demand-side of the market, the increase for mortgage rates for the first half of 2022 has priced out a significant number of prospective home buyers, as reflected by the decline for the traffic measure of the HMI.”

Housing ETFs to Track

Against such a backdrop, here are a few housing ETFs that might feel the pinch from the volatile housing sector scenario:

iShares U.S. Home Construction ETF ITB

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 an AUM of $1.40 billion, iShares U.S. Home Construction ETF holds a basket of 47 stocks, heavily focused on the top two firms. ITB charges 41 bps as annual fees. iShares U.S. Home Construction ETF carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: More Pain Ahead for Housing ETFs?).

SPDR S&P Homebuilders ETF XHB

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 an AUM of $953 million. SPDR S&P Homebuilders ETF charges 35 bps of annual fees. SPDR S&P Homebuilders ETF carries a Zacks ETF Rank #3, with a High-risk outlook (read: Homebuilder ETFs Are Cheap: Time to Buy?).

Invesco Dynamic Building & Construction ETF PKB

Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 32 stocks, each accounting for less than 5.9% 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 $121.9 million. The total expense ratio is 0.60%.

Hoya Capital Housing ETF HOMZ

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 an AUM of $40.9 million. HOMZ charges 30 bps as annual fees (see all the Materials ETFs here).


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