Will housing ETFs continue to suffer from rising material costs?
The latest housing data continues to reflect the growing struggle of home builders with soaring softwood lumber prices and other material and labor costs. According to the US Census Bureau and the US Department of Housing and Urban Development, housing starts soared 3.6% at a seasonally adjusted annual rate of 1.572 million units in May. The reading was behind analysts’ expectations of 1.630 million units, according to a Reuters poll. Notably, housing starts jumped 50.3% year over year.
Building permits, a construction indicator for the coming months, fell 3% month-over-month to a rate of 1.681 million units last month. The metric increased 34.9% year over year.
Single-family home construction, which makes up a large part of the housing market, rose 4.2% to 1.098 million units in May. Meanwhile, building permits for single-family homes fell 1.6% to 1.130 million units over the period, the sources said.
Continuing, starts for the multi-family housing segment rose 2.4% to 474,000 units last month. However, permits fell 5.8% to 551,000 units in May for the construction of multi-family homes.
Commenting on the housing scenario, Robert Frick, a business economist with the Navy Federal Credit Union in Vienna, Va., Said that “shortages of materials and labor are making builders struggling to increase the price. production of new homes, although demand remains strong. Prospective buyers should expect tight stocks and higher prices for new and existing homes for the foreseeable future, ”according to a Reuters report.
Rising material costs remain a headwind
The US housing sector appealed to investors with impressive performance amid a difficult pandemic. In fact, residential construction investment has increased by double digits since the third quarter of 2020, according to a Reuters report. Moreover, market experts expect the housing sector to contribute modestly to the growth of gross domestic product in the second quarter.
However, it appears that the space is now faced with rising timber prices. Rising costs for lumber, materials and labor continue to be a major hurdle for home builders. Supply chain disruptions caused by the lockdown to contain the coronavirus outbreak have also led to an increase in concrete, metal products, appliances and other spending, as mentioned in a FOX Business article.
Notably, there was a 154.3% year-over-year increase in May in prices for softwood lumber, which is used for the construction of frames and house trusses, according to an article by Reuters. In addition, there has been a sharp increase in plywood prices. Ongoing scarcity of copper supplies as well as tariffs on steel imports are also increasing construction costs. In addition, the scarcity of semiconductor supplies around the world has led to a decrease in the supply of some devices, according to a Reuters report.
These factors affect affordability as the prices of existing and new homes skyrocket. Notably, house prices have risen the most in over 15 years a year, raising concerns that some first-time homebuyers could be shut out of the market, as reported in a Reuters article.
In addition, low employment levels could hamper the dynamics of the US real estate market.
Home completions also fell 4.1% to a rate of 1.368 million units in May. In addition, the housing supply crisis is expected to persist, as the number of housing units approved for construction but not yet started has risen to the highest level since 1999, according to a Reuters report. This factor is also expected to increase house price inflation for some time.
Meanwhile, the housing market has regularly benefited from the changing demographic preferences of a large part of the population, with people increasingly looking for properties suitable for working from home. Notably, individuals were moving from city centers to suburbs and other low-density areas in search of spacious accommodations for home offices and schools, the sources said.
Commenting on current market conditions, Charlie Dougherty, economist at Wells Fargo in Charlotte, NC, said that “new residential construction remains strong, but prices and the availability of building materials are likely to remain significant headwinds,” as mentioned in a Reuters article. .
Real estate ETFs that could suffer
In such a context, here are some real estate ETFs that could suffer from the current real estate sector scenario:
IShares US Home Construction ETFs ITB
This fund provides exposure to US companies that manufacture residential homes by tracking the Dow Jones US Select Home Construction index. With assets under management of $ 2.60 billion, he owns a basket of 46 stocks, heavily focused on the two largest companies. The product charges 42 basis points (bps) of annual fee (read: Core inflation at its highest in 29 years: 6 ETF domains that will benefit).
SPDR S&P Homebuilders ETFs XHB
A popular choice in home construction, XHB, tracks the S&P Homebuilders Select Industry Index. The fund has around 35 securities in its basket. It has assets under management of $ 1.89 billion. The fund charges 35 basis points of annual fees (read: 5 ETFs that exploded in Biden’s 100-day tenure).
Invesco Dynamique Bâtiment et Construction ETF PKB
This fund tracks the Dynamic Building & Construction Intellidex Index, holding a basket of 30 well-diversified stocks, each representing less than 5.55% of the stocks. He has amassed assets worth $ 298.7 million. The expense rate is 0.59%.
Hoya Capital Housing ETF HOMZ
The fund seeks to provide investment results that, before fees and expenses, generally match the total return performance of the Hoya Capital Housing 100 Index, a rules-based index designed to track the 100 companies that collectively represent the performance of the US housing industry. It has assets under management of $ 72.6 million. The fund charges 30bp annual fees (see all the Materials ETFs here).
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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.