High Mortgage Rates Pull Down Homebuilder ETFs

The recovery in the U.S. housing market has fizzled due to higher mortgage rates, which are taking a toll on builder confidence and consumer demand. This is especially true as mortgage rates topped the highest level since November 2000 last week, and applications for home purchases tumbled to a multi-decade low.

Higher mortgage rates are dampening housing market activity, with ETFs starting to show the pain. iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB, Invesco Dynamic Building & Construction ETF PKB and Hoya Capital Housing ETF HOMZ are down in double digits each over the past month.

According to the latest Mortgage Bankers Association, the average rate for the 30-year fixed mortgage climbed to 7.8%, up from 7.55% in the previous week. This has squeezed affordability hitting both the new and existing home sales markets and sparked a slowdown in home sales, posing a challenge particularly for first-time buyers. As a result, higher mortgage rates have a dual impact on the housing market, reducing affordability for buyers and strengthening the rate lock-in effect for sellers.

This uptick has propelled the monthly costs for households. For instance, a 30-year, $400,000 mortgage now commands nearly $1,000 extra each month compared to the previous year. This added cost of financing a mortgage, along with rising home prices due to a historically low inventory of homes for sale, has sent home affordability to its lowest level in several decades. Builder sentiment slipped into negative territory in September for the first time in five months (read: 4 ETFs to Tap the Upbeat U.S. Construction Sector).

Sam Khater, Freddie Mac’s chief economist said that several factors, including shifts in inflation, the job market and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates and pulling back homebuyer demand. The further increase in interest rates will continue to weigh on prospective buyers and homeowners looking to finance. The central bank is likely to keep the interest rates elevated at least for the near term.

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ETFs in Focus

iShares U.S. Home Construction ETF (ITB)

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $1.8 billion, iShares U.S. Home Construction ETF holds a basket of 46 stocks with a heavy concentration on the top two firms. The product charges 40 bps in annual fees and trades in a heavy volume of around 3.6 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: How Rising Rates Are Impacting Housing ETFs).

SPDR S&P Homebuilders ETF (XHB)

SPDR S&P Homebuilders ETF provides exposure to homebuilders with a well-diversified exposure across building products, home furnishing, home improvement retail, home furnishing retail and household appliances. It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket.

SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with AUM of $1 billion and an average daily volume of 3.6 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook.

Invesco Dynamic Building & Construction ETF (PKB)

Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding 31 well-diversified stocks in its basket, with none accounting for more than 5.7% of the assets.

Invesco Dynamic Building & Construction ETF has amassed assets worth $199.9 million and sees a lower volume of roughly 53,000 shares per day on average. Expense ratio comes in at 0.62%. Invesco Dynamic Building & Construction ETF has a Zacks ETF Rank #2 with a High risk outlook.

Hoya Capital Housing ETF (HOMZ)

Hoya Capital Housing ETF invests in 100 domestic companies involved across the U.S. housing industry, including rental operators, homebuilders, home improvement companies, and real estate services and technology firms, by tracking the Hoya Capital Housing 100 Index.

Hoya Capital Housing ETF has accumulated $32.5 million in its asset base and charges 30 bps in annual fees. The product trades in an average daily volume of 2,000 shares and has a Zacks ETF Rank #3 (Hold).

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SPDR S&P Homebuilders ETF (XHB): ETF Research Reports

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

Invesco Building & Construction ETF (PKB): ETF Research Reports

Hoya Capital Housing ETF (HOMZ): ETF Research Reports

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