The U.S. housing sector continues to be strong amid worries surrounding soaring softwood lumber prices and other material and labor costs. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes remained flat at 83 for May in comparison to 82 in March, 84 in February, 83 points in January and 30 in April (the lowest since June 2012). However, the reading looks strong as any reading above 50 signals at improving confidence.
Notably, the current sales conditions index remained steady at 88 in May. The metric measuring traffic of prospective buyers declined by a point to 73. Meanwhile, sales expectations for the next six months increased a point to 81, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined four points to 82. Moreover, the South Index rose a point to 84. Also, the Western Index remained steady at 90. Meanwhile, the Midwest slid three points to 75, per the release.
Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “low interest rates are supporting housing affordability in a market where the cost of most materials is rising. In recent months, aggregate residential construction material costs were up 12% year over year, and our surveys suggest those costs are rising further. Some builders are slowing sales to manage their own supply chains, which means growing affordability challenges for a market in critical need of more inventory.”
Current US Housing Market Scenario
Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. In fact, there has been a more than 300% rise in lumber prices from April 2020. Moreover, costs of other materials like steel, concrete and gypsum products are rising at a record pace, per official NAHB data. According to a Reuters article, lumber prices increased 89.7% on a year-on-year basis in April. Going by the same article, tariffs on steel imports have imposed the burden of soaring costs on builders.
Also, supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have led to the rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article. These factors are affecting affordability as prices of existing and new homes are soaring.
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 current market conditions, NAHB Chairman Chuck Fowke has reportedly said that “Builder confidence in the market remains strong due to a lack of resale inventory, low mortgage interest rates, and a growing demographic of prospective home buyers.” He also said that “Policymakers must take note and find ways to increase production of domestic building materials, including lumber and steel, and suspend tariffs on imports of construction materials.”
Homebuilder ETFs That Might Gain
Against such a backdrop, here are a few housing ETFs that might rise amid the current 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 $3.18 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 $2.31 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 32 stocks, each accounting for less than a 5.45% share. It has amassed assets worth $307.2 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 $73.2 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).
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SPDR-SP HOMEBLD (XHB): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
INVS-DYN BLDG (PKB): ETF Research Reports
HOYA CAP HOUSNG (HOMZ): ETF Research Reports
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