Friday’s lackluster new-home sales report seems to back up fears that rising mortgage rates could hamper the housing recovery and spill over into the broader economy.

The SPDR S&P Homebuilders ETF (NYSEArca: XHB) is down 5.9% over the past month and iShares U.S. Home Construction ETF (NYSEArca: ITB) lost 8.6% in the last month. XHB is still up 9.1% year-to-date and ITB remains flat for the year. [Homebuilder ETF in Bear Market on Rates, Falling Mortgage Applications]

“The more recent leveling out in new housing starts suggests residential investment may stagnate or even contract in the third quarter,” Capital Economics analysts said, reports Ruth Mantell for MarketWatch.

Last week, the government revealed that construction starts on new homes increased 5.9% in July, a little below Wall Street expectations, after falling in June.

Nevertheless, long-term construction trends still show positive growth. Housing starts in July were up 21% for the same period year-over-year. Additionally, starts could hit 1.2 million in 2014 as single-family home construction “finally begins a true recovery,” according to Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch. [iShares: Housing Will Help Make or Break U.S. Recovery]

“In order to match last year’s rate of 1 million, we would need to see a rapid acceleration in the second half of the year and/or revisions to the first half,” Meyer added. “While we expect a pickup over the rest of the year amid stronger economic growth, it suggests some caution for housing starts.”

Home construction related ETFs started weakening as mortgage rates inched higher. Additionally, the slow job growth has kept many Americans from purchasing new homes.

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