Will Housing ETFs Suffer as US New Home Sales Decline?

The U.S. housing sector has been consistently grappling with soaring softwood lumber prices and other material and labor costs. Now, the new home sales falling to a one-year low in May highlights the same. Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development data, new home sales were down 5.9% in May to a seasonally-adjusted annual rate of 769,000 units (the lowest level since May 2020). This compares unfavorably with April’s downwardly revised sales of 817,000 units from 863,000 units.

Moreover, the metric lagged economists’ forecast of 870,000 units in May, per a Reuters poll. New home sales rose 9.2% in May year over year, gaining from a limited inventory of previously owned homes. Notably, new home sales are considered a leading housing market indicator since it is counted at the signing of a contract, per a Reuters article.

New home sales declined 14.5% in the Southern region. Meanwhile, new home sales were up in the Northeast and West and remained flat in the Midwest, last month. Notably, there was an 18.1% year-over-year rise in median new house price to $374,400 in May, per a Reuters article. Also, the number of new homes on market in May rose to 330,000 from 315,000 in April.

Current U.S. Housing Market Scenario

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. In fact, residential construction investment rose double digits since the third quarter of 2020, per a Reuters article. Moreover, market experts expect the housing sector to contribute modestly to gross domestic product growth in the second quarter.

However, it seems the space is now facing the brunt of rising lumber prices. Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. The supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have also led to a rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article.

Notably, there was a 154.3% year-over-year rise in May in prices of softwood lumber, which is used for constructing frames and trusses of houses, per a Reuters article. Moreover, there was a sharp rise in prices of plywood. Going on, scarcity in supplies of copper along with tariffs on steel imports is also bumping up building costs. Moreover, scarce supplies of semiconductors globally have resulted in shrinking supplies of some appliances, per a Reuters article.

These factors are affecting affordability as prices of existing and new homes are soaring. Notably, house prices soared the most in more than 15 years annually, increasing worries that some first-time buyers might be priced out of the market, as stated in a Reuters article.

Also, low employment levels might impede momentum of the U.S. housing market. Moreover, it is expected that the housing supplies crunch will remain as the number of homes authorized for construction but not yet begun increased to the highest level since 1999, per a Reuters article. This factor is also expected to increase housing price inflation for a while.

Meanwhile, the housing market has steadily benefited from changing demographical preferences of a large chunk of population as people increasingly looked for work-from-home-friendly properties. Notably, individuals were shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources.

Commenting on the housing market, Mark Vitner, a senior economist at Wells Fargo in Charlotte, NC, has said, “While we remain optimistic about housing demand for the year as whole, we may see a few more months of underwhelming sales. Several builders have reported lighter prospective buyer traffic in recent weeks, particularly in what had been some of the hottest housing markets in the South and Mountain West,” per a Reuters article.

Housing ETFs That Might Suffer

Against such a backdrop, here are a few housing ETFs that might struggle due to the tough 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 AUM of $2.43 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: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

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 AUM of $1.90 billion. The fund charges 35 bps in annual fees (read: 5 ETFs That Skyrocketed During Biden’s 100 Days in Office).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.50% share. It has amassed assets worth $287 million. The expense ratio is 0.59% (read: Looking for Earnings Surprise? 6 Sector ETFs to Play).

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 represents the performance of the U.S. housing Industry. It has AUM of $74.2 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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