The latest existing home sales data looks disappointing. Per the National Association of Realtors (NAR) report, there was a 3.7% month-over-month decrease in existing homes sales to a seasonally-adjusted annual rate of 6.01 million units in March. However, existing home sales rose 12.3% year over year.

First-time buyers accounted for 32% of sales in March, rising from 31% in February but comparing unfavorably with 34% in the year-ago period. Existing homes sales dropped in the Midwest and South by 2.3% and 2.9% month over month, respectively, in March. Furthermore, sales in the Northeast and West declined a respective 1.3% and 8% from February’s figure.

Commenting on the housing market scenario, Lawrence Yun, NAR’s chief economist, reportedly said, “consumers are facing much higher home prices, rising mortgage rates, and falling affordability, however, buyers are still actively in the market. The sales for March would have been measurably higher, had there been more inventory. Days-on-market are swift, multiple offers are prevalent, and buyer confidence is rising.”

Moreover, the median existing-home price for all housing types was $329,100, up 17.2% year over year in March, marking the 109th consecutive month of year-over-year gains.

How is the U.S. Housing Market Positioned?

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.

Going on, there has been a rise in the average commitment rate. Per the Freddie Mac, fixed-rate mortgage came in at 3.08% in March, comparing favorably with 2.81% in February.

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.

Thus, commenting on the market conditions, Yun has reportedly said that "at least half of the adult population has received a COVID-19 vaccination, according to reports, and recent housing starts and job creation data show encouraging dynamics of more supply and strong demand in the housing sector."

Housing ETFs That Might Suffer

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 $2.81 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 $2.08 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 $270.6 million. The expense ratio is 0.59% (read: 5 Undervalued Sector ETFs to Tap as Stocks Hit All-Time High).

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 $67.3 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).