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Will ETFs Suffer as US Homebuilder Confidence Dips in May?

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The U.S. housing sector is feeling the heat of rising interest rates and mounting material costs amid supply-chain disruptions of lumber and building materials. These factors are affecting the affordability of houses and increasing their prices. Consequently, a drop in the homebuilder sentiment for the fifth straight month was witnessed in May. The metric has also slipped to its lowest level since June 2020.

According to the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for the newly-built single-family homes slipped eight points to 69 in May from 77 in April, 79 in March, 81 in February and 83 in January. However, the reading looks strong as any number above 50 signals improving confidence.

The disappointing data can weigh on ETFs like iShares U.S. Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB), Invesco Dynamic Building & Construction ETF (PKB) and Hoya Capital Housing ETF (HOMZ), which have high exposure to companies belonging to the housing space.

The current sales conditions index declined eight points to 78 in May. The metric measuring traffic of prospective buyers saw a nine-point fall to 52. Sales expectations for the next six months slipped 10 points to 63, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast was steady at 72. However, the South and Midwest Index declined two and seven points, respectively, to 80 and 62 each. Moreover, the West lost six points to 83, per the release.

Going by the press release, NAHB chairman Jerry Konter reportedly said: “Housing leads the business cycle and housing is slowing. The White House is finally getting the message and yesterday released an action plan to address rising housing costs that emphasizes a very important element long-advocated by NAHB – the need to build more homes to ease the nation’s housing affordability crisis.”

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

The U.S. housing sector is persistently grappling with the rising softwood lumber, material and labor costs. Moreover, there was a sharp spike in plywood prices. Scarcity in copper supplies and tariffs on steel imports are bumping up the building costs. These factors are affecting the affordability as prices of the existing and new homes are soaring.

The rising costs and increasing interest rates will dampen the favorable demand scenario, led by low housing inventory and favorable demographics. Rising home prices and interest rates are weighing on housing affordability. To control hot inflation readings, the Fed hiked rates twice by 0.25% and 0.50% in 2022. The central bank plans to start reducing its balance sheet in June this year.

Commenting on the housing market conditions, NAHB chief economist Robert Dietz reportedly said that “the housing market is facing growing challenges. Building material costs are up 19% from a year ago, in less than three months mortgage rates have surged to a 12-year high and based on current affordability conditions, less than 50% of new and existing home sales are affordable for a typical family. Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates.”

Housing ETFs to Track

Against such a backdrop, here are a few housing ETFs that might feel the pinch from the volatile 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 an AUM of $1.40 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 Beaten-Down ETFs to Buy at Attractive Prices).

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 $1.18 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.

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 5.6% 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 $140.5 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.

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 ETFhas an AUM of $45 million. HOMZ charges 30 bps as annual fees. HOMZ carries a Zacks ETF Rank #2 (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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