Will Housing ETFs Suffer as New Home Sales Dip in February?

The U.S. housing sector is suffering setbacks from surging mortgage rates and a decreasing affordability of houses, which are ruling out first-time buyers from the market place. The space is also persistently enduring supply-chain disruptions of lumber and building materials, increasing construction costs and the Fed’s tightening monetary policy move. This induced the home builder sentiment to decline for the third straight month in March and also slip below the 80-point mark since last September.

Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development data, new home sales were down 2% in February to a seasonally-adjusted annual rate of 772,000 units. This compares unfavorably with January’s revised sales of 788,000 units from the previously reported 801,000 units.

Also, the metric lagged economists’ forecast of a rise to 810,000 units in February, per a Reuters’ poll. New home sales declined 6.2% year over year last month. The same is considered a leading housing market indicator since it is counted at the time of signing a contract, per a Reuters article.

New home sales rose in the Northeast and Midwest regions. However, both declined in the Southern and West areas in February. Median new house price witnessed a 10.7% year-over-year rise to $400,600 in February, per a Reuters article. Also, the number of new homes in the market rose to 407,000 in February (hitting the highest level since August 2008).

How’s the U.S. Housing Market Looking?

The U.S. housing sector is consistently grappling with the rising softwood lumber, material and labor costs. In fact, the construction costs rose 20% from last-year levels (per the NAHB press release). Moreover, there was a sharp rise in plywood prices. Scarcity in copper supplies and tariffs on steel imports are bumping up the building costs. These factors are affecting affordability as prices of the existing and new homes are soaring.

The rising costs and increasing interest rates will dampen the favorable demand scenario, stemming from low housing inventory and favorable demographics. Increasing home prices and interest rates are weighing on housing affordability. Per NAHB press release, around 69% of all U.S. households is unable to purchase a new median-priced home.

To control hot inflation readings, the Federal Reserve approved a 0.25 percentage point rate hike (the first increase since December 2018) on Mar 16. Following the hike, the benchmark interest rates will fall into a 0.25-0.5% range. In fact, the Federal Reserve announced plans to increase interest rates six times this year, bringing to a consensus funds rate of 1.9% by 2022 end (per a CNBC article).

The rising mortgage rates are also taking a toll on the sector. According to the Mortgage Bankers Association data on Mar 23, the 30-year fixed mortgage rate surged to its three-year high mark of 4.5% last week, per a Reuters article.

Housing ETFs to Track

Against such a backdrop, here are a few housing ETFs that might feel the heat from the rough housing sector scenario:

iShares U.S. Home Construction ETF ITB

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $1.99 billion, iShares U.S. Home Construction ETF holds a basket of 47 stocks, heavily focused on the top two firms. ITB charges 41 basis points (bps) as annual fees. iShares U.S. Home Construction ETF carries a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: 5 Top-Ranked ETFs on Sale).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, SPDR S&P Homebuilders ETF follows the S&P Homebuilders Select Industry Index. SPDR S&P Homebuilders ETF holds about 35 securities in its basket.

XHB has an AUM of $1.62 billion. SPDR S&P Homebuilders ETF charges 35 bps of annual fees. SPDR S&P Homebuilders ETF carries a Zacks ETF Rank #2, with a High-risk outlook (read: Housing ETFs Likely to Spring Up in the Key Selling Season).

Invesco Dynamic Building & Construction ETF PKB  

Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.9% share. The index comprises companies primarily engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines and airports.

Invesco Dynamic Building & Construction ETF amassed assets worth $217.6 million. The total expense ratio is 0.60%. Invesco Dynamic Building & Construction ETF carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: 6 Sector ETFs That Show Promise After Jobs Data).

Hoya Capital Housing ETF HOMZ

Hoya Capital Housing ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represent the performance of the U.S. housing industry.

Hoya Capital Housing ETF has an AUM of $62.2 million. The fund charges 30 bps as annual fees. It carries a Zacks ETF Rank #2 (see all the Materials ETFs here).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.