ETFs tracking homebuilders and related housing stocks were selling off Friday after a report on July new-home sales came in much lower than expected.

The iShares US Home Construction (NYSEArca: ITB) and SPDR S&P Homebuilders (NYSEArca: XHB) were down 3% and 2%, respectively.

The Commerce Department said U.S. new-home sales dropped 13.4% to a seasonally adjusted annual rate of 394,000 in July, the lowest rate since October, MarketWatch reports. Economists had expected sales of 485,000.

The miss is notable because the housing market rebound is seen as a key driver of the economic recovery.

Builder ETFs have been weak recently as mortgage rates rise along with Treasury yields. [Homebuilder ETF in Bear Market on Rates, Falling Mortgage Applications]

“The housing market has been one of the strongest performers this year in an otherwise sluggish economy, helped by steady job gains and low mortgage rates. But mortgage rates have risen a full percentage point since May and now threaten to steal some of the market’s momentum,” Bloomberg reports. “Higher mortgage rates were likely a key reason sales surged in June, as many buyers moved to lock in lower rates before they climbed further. Some economists speculate that the rush to buy in June may have held back sales in July.”

iShares US Home Construction

Full disclosure: Tom Lydon’s clients own XHB.

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