Will High Mortgage Rates Halt The Housing ETF Rally?

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The U.S. housing market has shown immense improvement this year buoyed by solid demand for housing, lack of existing inventory and gradual improvements in supply chains. As a result, 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) are up 43.5%, 37.2%, 36.8% and 22.6%, respectively so far this year.

However, higher mortgage rates are dampening housing market activity, with ETFs starting to show the pain. The abovementioned funds dropped nearly 2% each over the past week.


High Mortgage Rates a Concern?

Mortgage rates have touched their highest level in more than two decades. According to the latest Freddie Mac's release, the average rate for the 30-year fixed mortgage climbed to 7.09% — the highest point since the first week of April 2002 — and marked just the third time when rates exceeded 7% since then. This is higher than 5.13% recorded in the year-ago quarter.

The increase in rates coupled with a near-record surge in home prices has made home ownership more expensive for first-time buyers, discouraging people from buying homes. The surge came following the rise in yields propelled by a series of interest rate hikes from the Federal Reserve. The further increase in interest rates will continue to weigh on prospective buyers and homeowners looking to finance. The central bank seems unlikely to ease monetary policy anytime soon (read: More Rate Hikes in Cards On Sticky Inflation? ETFs to Buy).

Against this backdrop, U.S. home builder confidence weakened in August for the first time this year. The National Association of Home Builders/Wells Fargo Housing Market Index dropped to 50 in August from a 13-month peak of 56 in July. According to the NAHB chair and a homebuilder and developer from Birmingham, Alabama, “rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August.”


Any Bright Spot?

New home construction has picked up in recent months, with housing starts rising 3.9% to 1.452 million units in July. Low inventory in the existing home market continued to boost interest in new homes.

Additionally, Warren Buffett is betting big on the U.S. housing market. Per the latest 13F filing, the legendary investor introduced new stakes in D.R. Horton (DHI - Free Report) , NVR Inc (NVR - Free Report) , and Lennar Corp (LEN - Free Report) during the second quarter. The move indicates the resilience and potential of the U.S. housing market and could be a bullish sign for the housing market.

Historically, when Berkshire Hathaway takes a position in a sector, it often leads to increased investor interest and, sometimes, a rally in the associated stocks (read: Is It Time to Buy Homebuilding ETFs Following Warren Buffett?).

While the housing market is struggling with higher mortgage rates, Buffett's bet suggests more opportunities for homebuilders than threats.

ETFs in Focus

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

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 $2.4 billion, iShares U.S. Home Construction ETF holds a basket of 48 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 2.4 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: Housing ETFs to Gain Despite a Dip in New Home Sales: Here's Why).

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

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 $1.4 billion and an average daily volume of 2.6 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 - Free Report)

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 5.2% of the assets.

Invesco Dynamic Building & Construction ETF has amassed assets worth $261.2 million and sees a lower volume of roughly 33,000 shares per day on average. Expense ratio comes in at 0.57%. 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 $36.9 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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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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