Will ETFs Gain From Upbeat US Homebuilder Confidence in October?

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The U.S. housing sector has once again witnessed a bright spot with strength in housing demand which has improved for the second consecutive month. However, headwinds like increasing construction costs and continued material supply-chain worries along with rising home prices remain concerns. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for the newly-built single-family homes rose four points (the highest since November 2020) to 80 in October from 76 in September, 75 in August, 80 in July and 30 in April (the lowest since June 2012). The metric also beat analysts’ estimate of 76, per a Reuters poll. The reading looks strong as any number above 50 signals improving confidence.

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The current sales conditions index increased five points to 87 in October (the highest since June). The metric measuring traffic of prospective buyers also saw a four-point rise to 65. Sales expectations for the next six months increased by three points to 84, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast remained flat at 72. Also, the South and Western Index remained steady at 80 and 83, respectively. The Midwest increased by a point to 69, per the release

Going by the press release, NAHB Chairman Chuck Fowke reportedly said that, “Although demand and home sales remain strong, builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times and putting upward pressure on building material and home prices.”

Current U.S. Housing Market Scenario

The U.S. housing sector pleased investors with an impressive performance despite the tough pandemic times. However, rising softwood lumber, material and labor costs remained a major hurdle for homebuilders. The supply-chain disturbances majorly at saw mills and ports caused by the lockdown to contain the coronavirus outbreak also escalated concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article.

Moreover, there was a sharp rise in plywood prices. Scarcity in the supplies of copper along with tariffs on steel imports is bumping up building costs. The scanty global supply of semiconductors shrank the supplies of some appliances, per a Reuters article. These factors are affecting the affordability as the prices of existing and new homes are soaring.

The U.S. housing space might have to grapple with rising interest rates in the near term as the Fed will begin the tapering process. In fact, according to the Mortgage Bankers Association, home loan interest rates have already started to increase, with the average 30-year mortgage rate rising to 3.18% in early October (the highest since June), as mentioned in a Reuters article.

The recently released minutes from the Federal Open Market Committee’s September meeting highlighted that the Fed might begin tapering the fiscal stimulus support program from mid-November.

The central bank is expected to roll back the month-end bond purchases by cutting $10 billion of $80 billion a month in Treasury’s and $5 billion from $40 billion a month in mortgage-backed securities (per a CNBC article). If everything goes well, the Federal Reserve expects to finish off purchases by mid-2022.

NAHB chief economist Robert Dietz reportedly commented, “Builders are getting increasingly concerned about affordability hurdles ahead for most buyers. Building material price increases and bottlenecks persist and interest rates are expected to rise in coming months as the Fed begins to taper its purchase of U.S. Treasuries and mortgage-backed debt. Policymakers must focus on fixing the broken supply chain. This will spur more construction and help ease upward pressure on home prices.”

Housing ETFs That Might Gain

Against such a backdrop, here are a few housing ETFs that might gain on slight improvement in the 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 $2.36 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 41 basis points (bps) in annual fees (read: 5 ETFs to Cash In On Record High U.S. Household Net Worth).

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 $1.73 billion. The fund charges 35 bps in annual fees (read: Top-Ranked ETFs That Are Up At Least 25% So Far This Year).

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 a 5.60% share. It has amassed assets worth $276.1 million. The total expense ratio is 0.60%.

Hoya Capital Housing ETF HOMZ

The fund 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 represents the performance of the U.S. housing industry. It has AUM of $74.7 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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