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.
Many are also still finding it hard to acquire the necessary credit from tightfisted bankers who remain scarred from happened during the last housing bubble. While credit availability is rising, banks are sticking to a rigid set of rules for assessing credit scores and loan-to-value ratios for those with questionable borrowing histories. However, lending practices are loosening, with government lenders diminishing down payment requirements and private banks eying a profit motive to boost loans. Lawrence Yun, chief economist at the National Association of Realtors, argues that looser credit availability could help offset the negative impact of rising rates.
Lastly, wages remain a key impediment to growth in the housing market. Anika Khan, a Wells Fargo Securities economist, believes larger paychecks will be the key for stronger home sales, even if mortgage rates rise.
“What could move the needle is stronger wage growth — a lagging indicator,” Khan said in the article. “Let’s say it lags a year — then we could trickle into 2016 and actually see a little bit more activity happen.”
iShares U.S. Home Construction ETF
For more information on the housing market, visit our homebuilders category.