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The U.S. housing sector continues to suffer supply-chain disruptions of lumber and building materials, increasing construction costs, and the Fed’s monetary policy tightening move. This caused the homebuilder sentiment to decline for the third straight month and to slip below the 80-point mark since last September.

According to the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes slipped two points to 79 in March this year from a downward-revised February reading of 81 in January and 84 in December. However, the reading looks strong as any number above 50 signals improving confidence.

The disappointing data may weigh on ETFs like iShares U.S. Home Construction ETF (ITB - Free Report), SPDR S&P Homebuilders ETF (XHB - Free Report), Invesco Dynamic Building & Construction ETF (PKB - Free Report), and Hoya Capital Housing ETF (HOMZ - Free Report), which all have high exposure to companies belonging to the housing space.

The current sales conditions index declined three points to 86 in March. The metric measuring traffic of prospective buyers saw a two-point increase to 67. Sales expectations for the next six months slipped a massive 10 points to 70, per the NAHB press release.

The three-month moving averages for regional HMI scores in the Northeast declined seven points to 69. However, the South and Midwest Index declined three points and one point, respectively, to 83 and 72 each. However, the West inched up a point to 90, per the release.

Going by the press release, NAHB Chairman Jerry Konter reportedly said:

“While builders continue to report solid buyer traffic numbers, helped by historically low existing home inventory and a persistent housing deficit, increasing development and construction costs have taken a toll on builder confidence. We call upon policymakers to act now to ease supply-chain woes. Improving access to lumber, OSB and other materials will help builders increase the supply of badly-needed housing and fight inflation.”

How’s the U.S. Housing Market Looking?

The U.S. housing sector is consistently grappling with the rising softwood lumber, material, and labor costs. In fact, the construction costs rose 20% over last-year (per the NAHB press release). Moreover, there was a sharp rise in plywood prices. Scarcity in copper supplies and tariffs on steel imports are bumping up building costs. These factors are affecting affordability as prices of existing and new homes are soaring.

The rising costs and increasing interest rates will dampen the favorable demand scenario arising from low housing inventory and favorable demographics. In this regard, NAHB chief economist Robert Dietz reportedly commented:

“the March HMI recorded the lowest future sales expectations in the survey since June 2020. Builders are reporting growing concerns that increasing construction costs (up 20% over the last 12 months’ tally) and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market. While low existing inventory and favorable demographics are supporting demand, the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022."

Increasing home prices and interest rates are weighing on housing affordability. Per the NAHB press release, around 69% of all U.S. households are unable to purchase a new median-priced home.

In order to control hot inflation readings, the Federal Reserve approved a 0.25 percentage point rate hike (the first increase since December 2018) on March 16. Following the hike, the benchmark interest rates will fall into a range of 0.25-0.5%. In fact, the Federal Reserve announced plans to increase interest rates six times this year, bringing to a consensus funds rate of 1.9% by 2022 end (per a CNBC article).

Housing ETFs to Track

Against such a backdrop, here are a few housing ETFs that might feel the heat from the rough housing sector scenario.

iShares U.S. Home Construction ETF (ITB - Free Report)

The 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 $1.88 billion, the iShares U.S. Home Construction ETF holds a basket of 46 stocks, heavily focused on the top two firms. ITB charges 41 basis points (bps) as annual fees. The iShares U.S. Home Construction ETF carries a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: 5 Top-Ranked ETFs on Sale).

SPDR S&P Homebuilders ETF (XHB - Free Report)

As a popular choice in the homebuilding space, the SPDR S&P Homebuilders ETF follows the S&P Homebuilders Select Industry Index. The SPDR S&P Homebuilders ETF holds about 35 securities in its basket.

XHB has an AUM of $1.46 billion. The SPDR S&P Homebuilders ETF charges 35 bps of annual fees. The SPDR S&P Homebuilders ETF carries a Zacks ETF Rank #2, with a High-risk outlook (read: Housing ETFs Likely to Spring Up in the Key Selling Season).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)

The Invesco Dynamic Building & Construction ETF follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 32 stocks, each accounting for less than 5.5% share.

The index comprises companies primarily engaged in providing construction and related engineering services for building and remodeling residential properties, commercial, or industrial buildings or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines and airports.

The Invesco Dynamic Building & Construction ETF amassed assets worth $207.8 million. The total expense ratio is 0.60%. The Invesco Dynamic Building & Construction ETF carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: 6 Sector ETFs That Show Promise After Jobs Data).

Hoya Capital Housing ETF (HOMZ - Free Report)

The Hoya Capital Housing ETF seeks to provide investment results that, before fees and expenses, generally correspond to 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 U.S. housing industry.

The Hoya Capital Housing ETF has an AUM of $59.9 million. The fund charges 30 bps as annual fees. It carries a Zacks ETF Rank #2 (see all the Materials ETFs here).