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Will Trump Policies Spell Trouble for Homebuilding ETFs?

Sanghamitra Saha

Housing ETFs could be on a tear this year thanks to the sharp decline in mortgage rates, but the housing market has been struggling for five straight quarters now. Shortage of land and labor has been a pressing problem. Recently, Fed chief Powell commented that Trump administration’s immigration policy and tariffs have aggravated the problems of skilled labor shortage and high material costs.

Both factors are pushing home prices up, keeping potential first-time buyers on the sidelines. Data for the existing home sales for the month of May suggests that at the current pace of sales, it would take 4.3 months to deplete the available supplies. This is well below the six-month threshold that is usually considered the barometer of a balanced market.

The number of for-sale listings rose 2.8% annually in June but down from May’s 2.9% increase. Inventory gains “continued to slow throughout the spring and supply is now expected to flatten over the next three months and could hit its first decline in October of this year, according to realtor.com,” as quoted on cnbc.com.

What’s Pushing Raw Material Prices Up?

The imposition of tariff on imported Canadian lumber by the Trump administration is a concern. “Many Canadian lumber leaders have taken a hit - including West Fraser, Canfor, Conifex, and Interfor - and restricted lumber production,” per a source. Limited production has resulted in elevated prices. So far this year, the commodity has risen 9.4%. Overall, costs for homebuilders are on the rise while threats of “excessive regulation” are impeding construction.

Tougher Immigration Polices

Immigrants form about 17% of the U.S. labor force — about one in six workers. The Construction sector employs the maximum (24.1%) number of foreign-born workers. With Trump administration implementing stricter regulations on immigration, labor shortage is thus a severe problem. Builders, especially in the south and west, depend on immigrants for labor, much of it from Mexico, the country with which the Trump administration has been at loggerheads on the immigration issue.

Needless to say, groundbreaking would be hit hard. Single-family housing starts have been unimpressive so far this year. In May, housing starts dropped 6.4% sequentially and fell 12.5% year over year, according to the U.S. census. As a result, home prices are rising and rents have been surpassing wages and inflation.

What Lies Ahead?

A further drop in mortgage rates on a possible rate cut this year, rising wages and some upbeat earnings could boost the space in the near term though the medium term looks bleak amid overvaluation concerns. Investors should note that SPDR S&P Homebuilders ETF XHB has beaten the S&P 500 in the past six-month time frame on cues of dovish Fed activity. It means the move of policy easing is already priced-in. So, much of a bump from here is less expected.

Along with XHB, investors should keep a track of iShares U.S. Home Construction ETF ITB, The Hoya Capital Housing ETF HOMZ and Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL amid a volatile operating backdrop for the homebuilding market (see all industrial ETFs here).

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL): ETF Research Reports
 
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