Is the Home Construction ETF Rally Over?
The US housing market was hit hard early on amid the coronavirus lockdown in 2020. Either way, the space was struggling with a shortage of land and labor as well as higher prices. high. The COVID-19 outbreak has made matters worse. However, things improved markedly afterwards, as mortgage financing rebounded amid record interest rates thanks to the Fed’s ultra-relaxed monetary policy. Home sales increased significantly last year.
Housing construction fund IShares US Home Construction ETFs ITB is up 22% this year and gained 62.4% last year. This is in comparison to the 13.6% current year gains and 41.8% year over year gains of the S&P 500. However, things have taken a turn for the worse in the past month with ITB losing 5.4% while the S&P 500 is up 1.6%. .
Builder feeling drops
Builder sentiment in June fell to its lowest level since August, as construction costs pushed up new home prices, which sidelined buyers and made it more difficult for some smaller builders, those which represent two thirds of the housing construction market, to access loans, as quoted on CNBC.
The National Association of Home Builders / Wells Fargo Housing Market Index fell 2 points to 81, from a recent record high of 90 last November. Anything over 50 is still considered positive. Across the three components of the sentiment index, current selling conditions fell 2 points to 86. Selling expectations over the next six months fell 2 points to 79, and buyer traffic also declined. increased by 2 points south to reach 71.
Concerns in the sector
“Higher costs and declining availability of softwood lumber and other building materials lowered builder sentiment in June,” said NAHB President Chuck Fowke, as quoted on CNBC. Lumber prices have more than tripled in the past year, mainly due to strong demand from the housing sector.
After the pandemic, the “suburban renaissance”, record mortgage rates and a spree of home renovations have driven up wood prices. Although sawmills have significantly increased production to meet higher demand, it is still around 16% below the peak of 2006 (read: ETFs to benefit from soaring wood prices).
Although lumber prices are about 10% below their recent peak, they are still about 300% above the 15-year average. Not only lumber, but other raw material costs are also rising due to rising inflation and supply chain issues due to bottlenecks in many parts of the world. As a result, the median price of a new home in April rose 20% year over year.
In addition, discussions about raising rates are doing the trick. More recently, a few days ago, there was talk of the Fed promulgating at least two rate hikes by the end of 2023. Mortgage rates returned to the level above 3%. Analysts believe rates should rise based on economic improvement and rising inflation. So the days of cheap mortgage rates may soon be over.
Focus on ETFs
Against this background, below we highlight a few ETFs that should be watched in the coming days. These ETFs are ITBs, SPDR S&P Homebuilders ETFs XHB and Invesco Dynamique Bâtiment et Construction ETF PKB and Hoya Capital Housing ETF HOMZ.
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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.