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Rising Rates, Low Affordability Continue to Deconstruct Homebuilder ETFs

This article was originally published on ETFTrends.com.

A deadly combination of rising rates and low affordability continues to pound the housing industry, including homebuilders and homebuilder-focused exchange-traded funds (ETFs) alike, such as the Direxion Daily Homebuilders & Supplies Bull 3X ETF (NAIL) .

Luxury builder Toll Brothers Inc reiterated the slump in housing, saying that it saw the market "soften further" during the month of November. In addition to rising rates and low affordability, Toll Brothers CEO Douglas Yearley cited the media as another source of pain for homebuilders.

"In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown," Toll Brothers Chairman and CEO Douglas Yearley said in a statement.

The NAHB Housing Market Index for the US has fallen to 60 in November--it's lowest recording of the year.


Source: tradingeconomics.com

As the Dow Jones Industrial Average fell almost 800 points on Tuesday, homebuilder ETFs weren't spared from declines-- iShares US Home Construction ETF (ITB)  lost 4.75%, SPDR S&P Homebuilders ETF (XHB) fell 4.55% and Invesco Dynamic Building & Construction ETF (PKB) slid 4.79%. The 300% leverage in NAIL exacerbated homebuilder ETF declines with a sharp drop of 14.44%.

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.

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--right now, the CME Group's FedWatch algorithm shows a 78.4% chance of a rate hike in December. In September, 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.

Nonetheless, Yearley reminded investors that similar declines in the housing market were experienced in 2013 prior to an uptick--something NAIL traders will be watching closely.

“We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum,” Yearley told investors.

Related: Senior Loan ETFs Bolstered by Solid Economic Numbers

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