Are Housing ETFs in Trouble as US Homebuilder Confidence Drops?

The U.S. housing sector supported the economy by mostly staying resilient to the coronavirus outbreak amid a low-interest rate environment. However, it seems as if the space is now getting rattled by the aggravating pandemic and rising lumber prices. Hence, the U.S. homebuilder confidence in the market for single family homes surprisingly declined in January.

Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at 83 points in January in comparison to 86 in December, 90 in November, 85 in October and 30 in April (the lowest since June 2012). The metric also lagged economists’ expectations for remaining flat at 86, per a Reuters’ poll. However, the reading still looks strong. Any reading above 50 is considered positive and signals at improving confidence.

Notably, all three components of the index dropped in December. The current sales conditions came in at 90 in January after declining two points. The metric measuring traffic of prospective buyers also witnessed a five-point drop to 68. Meanwhile, sales expectations for the next six months dipped two points to 83, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined six points to 76. Moreover, the South Index slipped a point to 86. Also, the Western Index lost a point to 95. Meanwhile, the Midwest inched up two points to 83, per the release.

Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “while housing continues to help lead the economy forward, limited inventory is constraining more robust growth. A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability”.

Limited Inventory Remains a Tussle

The U.S. housing market continues to battle against restrained inventory conditions that are delaying the delivery times, largely due to land shortages, skilled labor deficiencies along with rising material costs. All these factors are affecting affordability as prices for the existing and new homes are soaring.

Another looming concern is the intensifying COVID situation, which is disrupting labor at construction sites to a large extent. According to John Hopkins University data, the United States witnessed 24,627,882 cases including a death toll of 410,105. This statistic was highlighted in a CNN report.

Commenting on the housing market, NAHB chairman Chuck Fowke reportedly said that “despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems. Builders are grappling with supply-side constraints related to lumber and other material costs, a lack of affordable lots and labor shortages that delay delivery times and put upward pressure on home prices. They are also concerned about a changing regulatory environment”.

Will Housing Sector Lose Momentum?

Low interest rates have been boosting demand in the housing market for a while now. Moving on, the ongoing low mortgage interest rate environment is predicted to prevail by some analysts. Amid the pandemic, the Fed has pledged to hold rates at a near-zero level and will continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of healthy inflation and maximum employment levels.

The housing market is also steadily benefiting from changing demographical preferences of a large chunk of population as people are now increasingly looking for work-from-home-friendly properties. Notably, individuals are shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources. At least 23.7% of the labor force is working remotely, per a Reuters article.

President Joe Biden’s proposed new policy can aid new homebuyers. Notably, first-time buyers are defined as those who haven’t purchased a home in at least three years. Biden offered a $15,000 first-time homebuyer tax credit that can be utilized to make down payments, per a CNBC article. If sanctioned, this incentive can make homes affordable, much like the $7,500 first-time homebuyer credit established under the Obama administration through the Housing and Economic Recovery Act.

Homebuilder ETFs to Watch Out for

Here are a few housing ETFs that might gain from the improving housing sector scenario:

iShares U.S. Home Construction ETF ITB

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With an AUM of $2.21 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: 4 Sector ETFs & Stocks to Bet on Q4 Earnings).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has an AUM of $1.46 billion. The fund charges 35 bps in annual fees (read: Ride the Housing Market Momentum With These ETFs).

Invesco Dynamic Building & Construction ETF PKB

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.08% share. It amassed assets worth $198.4 million. The expense ratio is 0.59% (read: 4 Sector ETFs & Stocks Top Despite Soft December Jobs Data).

Hoya Capital Housing ETF HOMZ

The fund seeks to provide investment results that before fees and expenses, correspond generally 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 US Housing Industry. It has an AUM of $44.7 million. The fund charges 30 bps in annual fees (see all the Materials 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
 
Invesco Dynamic Building & Construction ETF (PKB): ETF Research Reports
 
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
 
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