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Will Housing ETFs Rise on Upbeat US Housing Starts in March?

The latest housing data continues to reflect strength in the space as U.S. homebuilding jumped to nearly a 15-year high level in March. However, growing struggle of homebuilders with respect to soaring softwood lumber prices and other material and labor costs continue to dampen the prospects of the sector. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts climbed 19.4% to a seasonally-adjusted annual rate of 1.739 million units in March. The reading surpassed analysts’ expectations of 1.613 million units, per a Reuters’ poll. Notably, housing starts jumped 37% on a year-over-year basis.

Building permits, a construction pointer for the coming months, increased 2.7% month over month to a rate of 1.766 million units in the month. The metric was up 30.2% on a year-over-year basis.

There was a 15.3% rise in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.238 million units in March. Moreover, permits to construct single-family homes jumped 4.6% to 1.199 million units in the period, per the sources.

Going on, housing starts for the multi-family housing segment surged 30.8% to 501,000 units last month. Meanwhile, permits declined 1.2% to a pace of 567,000 units in March for building multi-family homes.

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. However, it seems the space is now facing the brunt of rising lumber prices.

Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. The supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have also led to the rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article. Notably, there was an 83.4% year-over-year rise in March in prices of softwood lumber, which is used for constructing frames and trusses of houses, per a Reuters article. Moreover, there was a sharp rise in prices of plywood. These factors are affecting affordability as prices for existing and new homes are soaring.

Per an Institute for Supply Management, congestion in the port on the West Coast as well as winter chills in Canada which has shut mills along with limited truck shipping were also responsible for the constrained supplies that were leading to higher prices of building materials, per a Reuters article.

Also, low employment levels and rising new coronavirus cases might impede momentum of the U.S. housing market.

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, Doug Duncan, chief economist at Fannie Mae in Washington, has said that “while housing demand is expected to remain strong, we expect it to diminish somewhat as the year progresses. Homebuilders continue to face supply constraints, including increasing prices of lumber and other materials,"as mentioned in a Reuters article.

Housing ETFs That Might Gain

Against such a backdrop, here are a few housing ETFs that might struggle due to the tough 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 $2.78 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: 4 Sector ETFs at All-Time Highs).

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 $1.98 billion and charges 35 bps in annual fees (read: 4 ETF Zones Set to Bloom in a Booming Job Market).

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 5.64% share. It has amassed assets worth $274.7 million. The expense ratio is 0.59% (read: ETFs to Win on Biden's Infrastructure Plan).

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 $65.4 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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