Many anticipate an interest rate hike would impede a growing housing market. However, homebuilder exchange traded fund investors should look to other, more pressing factors ahead.
Year-to-date, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) rose 4.8% and the iShares U.S. Home Construction ETF (NYSEArca: ITB) increased 6.3%. The homebuilders sector, though, has weakened over the past month, with ITB down 1.1% and XHB 1.9% lower.
Weighing on the housing market, the Federal Reserve has signaled it will hike rates slowly and incrementally, which could deter potential buyers from rushing into the market, Nationwide Insurance Chief Economist David Berson said in a Bloomberg article.
Nevertheless, the housing market could face other challenges. For instance, Svenja Gudell, senior director of economic research at Zillow Group Inc., believes that a tight housing inventory level could restrain would-be buyers – inventories in March experienced their first year-over-year dip since December 2013. If interest rates rise, Gudell points out that owners could hesitate when putting their homes on the market for fear of incurring higher mortgage rates on their next home, which is also known as the “lock-in effect.”
The cost of buying is on the rise. The home prices could continue to increase unless more new homes are put on the market, and housing costs are nearing pre-crisis, December 2007 levels.
Consequently, first-time buyers are being priced out of the market as credit constraints and diminished supply pressures sales. The number of first-time buyers has been unusually low and remains subdued over the past five years.