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Homebuilder ETFs Could Still Thrive Despite Rising Rates

This article was originally published on ETFTrends.com.

Three of the biggest homebuilder ETFs have been feeling the pangs of the current economic landscape of rising rates, such as iShares US Home Construction ETF (ITB) --down 12.53% year-to-date, SPDR S&P Homebuilders ETF (XHB) --down 10.26% YTD and Invesco Dynamic Building & Const ETF (PKB) --down 11.90 YTD%.

Despite this, all is not lost according to Robert Dietz, a chief economist and senior vice president for Economics and Housing Policy at the National Association of Home Builders.

"Rising interest rates are a concern in the housing sector," Dietz said in a blog. "Higher rates increase the cost of builder and developer debt financing, as well as raise the cost of buying a home with a mortgage. However, with respect to housing affordability, it’s important to remember that the primary reason interest rates are higher is that the economy is performing well."

Unfortunately, while the rest of the capital markets appear to be moving forward, it has left the housing sector in the rearview mirror. The biggest home builder ETF in terms of total assets, ITB, has largely diverted from the direction of the S&P 500 from a chart perspective.

Homebuilder ETFs Could Still Thrive Despite Rising Rates 1

Despite this, economic models at the NAHB are showing that home builders can weather the storm of higher interest rates.

"NAHB’s forecast model suggests single-family construction will continue to expand despite this change in conditions," added Dietz. "The top reason for this expectation is the fact that there is such a large degree of underbuilding in single-family markets, with just over 900,000 single-family starts expected this year, compared with the 1.2 million we believe the market could absorb."

Dietz did make a call upon lawmakers to take notice of the current economic conditions in the housing market, particularly with respect to affordability. With the capital markets relatively focused on the current bull run in the stock market and trade wars, it would be careless economic policy to ignore the housing market as it comprises 15-18% of the gross domestic product.

"For policymakers and community leaders concerned about affordability declining due to macroeconomic conditions, there’s no better time to try to reduce regulatory costs associated with home construction," said Dietz. "Ultimately, additional supply will help reduce the cost of the American dream."

Homebuilder Confidence Strong

Despite rising rates, the National Association of Home Builders released a separate report that showed homebuilder confidence in the U.S. held steady during the month of July. Additionally, the report stated that the NAHB/Wells Fargo Housing Market Index was unchanged in July after dipping to 68 in June.

"Consumer demand for single-family homes is holding strong this summer, buoyed by steady job growth, income gains and low unemployment in many parts of the country," said NAHB Chairman Randy Noel.

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