The U.S. housing sector is struggling with the surge in borrowing costs and high house prices that is severely affecting the affordability of the buyers. The impact of these factors can be seen in the U.S. new home sales, which declined for the fourth consecutive month in April 2022, touching a two-year low level.
Per the U.S. Census Bureau and the U.S. Department of Housing and Urban Development data, new home sales were down 16.6% in April to a seasonally-adjusted annual rate of 591,000 units. This compares unfavorably with March’s downwardly revised sales of 709,000 units from the previously reported 763,000 units.
Also, the metric lagged economists’ forecast of declining to 750,000 units in April, per a Reuters’ poll. New home sales declined 26.9% year over year last month. The same is considered a leading housing market indicator since it is counted when signing a contract, per a Reuters article.
New home sales declined in all four regions. Median new house price witnessed a 19.6% year-over-year rise to $450,600 in April, according to a Reuters article. Also, the number of new homes in the market rose to 444,000 in April from 410,000 units in March.
Current U.S. Housing Market Scenario
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.
The rising costs and increasing interest rates will dampen the favorable demand scenario, led by low housing inventory and favorable demographics. 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, Daniel Silver, an economist at JPMorgan has said that “Activity in the housing market has cooled significantly in recent months along with the recent jump in mortgage rates. While higher rates likely have been weighing on sales, limits in available inventory and high house prices also may be restraining activity,” as mentioned in a Reuter’s article.
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 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 $1.41 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).
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 $1.07 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 follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than 5.3% 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 $136 million. The total expense ratio is 0.60%. PKB carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook.
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 $44 million. HOMZ charges 30 bps as annual fees. HOMZ carries a Zacks ETF Rank #2 (see all the Materials ETFs here).