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Will Low Industry Sentiment Topple Homebuilder ETFs?

This article was originally published on ETFTrends.com.

The one-two punch combination of rising rates and low affordability continues to pound the housing industry as the National Association of Home Builders/Wells Fargo Housing Market Index, a key measure of homebuilder confidence, dropped eight points in November, but can this sustained attack topple homebuilder exchange-traded funds (ETFs)?

Following the latest reading, homebuilder ETFs were resilient, such as the iShares US Home Construction ETF (ITB) , SPDR S&P Homebuilders ETF (XHB) and the Invesco Dynamic Building & Construction ETF (PKB) . ITB was up slightly at 0.64%, while XHB rose 0.41% and PKB was practically unchanged.

Source: tradingeconomics.com

The latest homebuilder sentiment comes as the Mortgage Bankers Association reported last week that mortgage applications fell. Overall, mortgage application volume suffered, falling by 22% compared to a year ago and 3.2% lower compared to the previous week.

Rising in conjunction with mortgage rates are home prices, putting prospective buyers out of reach. The latest data from the National Association of Realtors showed that the Quarterly Housing Affordability Index has been dropping thanks to a rise in median home prices.

High Rates and Home Prices Slam Southern California Housing Market 1

Despite the doom and gloom, builder sentiment is still largely positive, which could keep homebuilder ETFs above water. ITB has fallen 28.45% year-to-date, while XHB lost 22.69% and PKB is down 24.95%--positivity in the face of these YTD losses can only help investors going forward, but a willingness to accept risk will also help.

“Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices,” said NAHB Chairman Randy Noel, a custom home builder from LaPlace, La.

“For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction,” said NAHB Chief Economist Robert Dietz. “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall.”

The Federal Reserve is slated to decide on interest rates in December, which could result in the fourth and final rate hike to end 2018. Last month, the central bank raised the federal funds rate by another 25 basis points to bring its current level to 2.25.

According to the NAHB, the housing market accounts for roughly 15-18% of the United States' gross domestic product. If the Fed sees the housing market too far in the rearview mirror going forward, it may posit further before continuing future rate hikes.

Right now, the CME Group's FedWatch algorithm shows a 65.4% chance of a rate hike in December.

Related: Senior Loan ETFs Bolstered by Solid Economic Numbers

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