U.S. Markets closed

Homebuilder ETFs Could Be Falling Apart as Construction Sentiment Plunges

This article was originally published on ETFTrends.com.

Homebuilder stocks and sector-related ETFs may be stuck in a mire as slowing demand among home buyers and a steep drop in housing starts drag down sentiment.

On Monday, the SPDR S&P Homebuilders ETF (XHB) slipped 0.5%, iShares U.S. Home Construction ETF (ITB) decreased 0.1% and Invesco Dynamic Building & Construction ETF (PKB) declined 1.0%

The home construction industry weakened Monday after the National Association of Home Builders revealed U.S. home builder sentiment saw its steepest one-month decline in over four-and-a-half years in November due to rising mortgage rates and a tight home inventory, Reuters reports.

“Today’s housing data was pretty bad,” Jim Smigiel, chief investment office of Absolute Return Strategies, told MarketWatch.

The NAHB and Wells Fargo housing market index decreased to 60 points in November, the lowest level since the 59 recorded in August 2016. In contrast, the index showed a reading of 68 in October and a consensus reading of 67 among analysts. The eight point fall off was the biggest monthly drop since a 10-point fall in February 2014.

"The housing sector's a disaster," CNBC's Jim Cramer said. "We're building about half the houses we did when the country had half the people, and we still can't sell them. KB Home does a huge amount of housing in California. They can't sell them."

According to the Commerce Department, U.S. homebuilding was worse than expected in September, with housing starts down 5.3% after slightly rising in August. Meanwhile, existing home sales plunged the most in over two years as rising materials costs weighed on the supply side and higher mortgage rates deterred buyers.

The Federal Reserve's tighter monetary policy and interest rate hikes have contributed to the spike in mortgage rates, which jumped above 5% in October. The Fed has stated it could hke rates in December and three more times in 2019.

However, this lull in the homebuilder segment may pass as U.S. consumers get use to the new norm.

“We’re in an adjustment period, where consumers are getting used to higher interest rates,” Smigiel added. “Other factors, like rising wages, low unemployment and demographic factors will help stabilize sentiment towards the housing sector,” in the coming months.

For more information on the housing market, visit our homebuilders category.