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Can ETFs Gain From Upbeat US Homebuilder Confidence in September?

The U.S. housing sector saw a bright spot with strength in housing demand and declining lumber prices. However, headwinds like increasing construction costs and continued material supply-chain worries along with rising home prices remain. These factors took a toll on builder confidence, which declined for three months. 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 a point to 76 in September from 75 in August, 80 in July, 81 in June and 30 in April (the lowest since June 2012). However, the reading looks strong as any number above 50 signals at improving confidence.

The current sales conditions index increased a point to 82 in September. The metric measuring traffic of prospective buyers also saw a two-point rise to 61. Sales expectations for the next six months remained flat at 81, per the NAHB press release. The three-month moving averages for regional HMI scores in the Northeast declined a couple of points to 72. Also, the Western Index slipped a couple of points to 83. The Midwest was steady at 68, per the release. Also, the South Index dropped two points to 80.

Going by the press release, NAHB chief economist Robert Dietz reportedly commented, “The single-family building market has moved off the unsustainably hot pace of construction of last fall and has reached a still hot but more stable level of activity, as reflected in the September HMI. While building material challenges persist, the rate of cost growth has eased for some products, but the job openings rate in construction is trending higher.”

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

Per the NAHB, the lumber prices plunged more than 60% from the peak reached in May but the overall aggregate residential construction material costs were up 13% on an annual basis in the first eight months of 2021, as mentioned in a Reuters article.

Consumers seem disturbed about the elevated prices of homes, vehicles and household durables. In fact, the buying attitude for vehicles and homes is contracting.

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

Commenting on the current market conditions, NAHB Chairman Chuck Fowke reportedly said that, “Builder sentiment has been gradually cooling since the HMI hit an all-time high reading of 90 last November. The September data show stability as some building material cost challenges ease, particularly for softwood lumber. However, delivery times remain extended and the chronic construction labor shortage is expected to persist as the overall labor market recovers.”

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 $2.40 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: Forget Bubble Fear: Bet on Housing ETFs).

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 $1.93 billion. The fund charges 35 bps in annual fees.

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 5.35% share. It has amassed assets worth $281.7 million. The expense ratio is 0.59%.

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 $80.1 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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