The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest exchange traded funds tracking homebuilders stocks, might appear to be vulnerable to higher interest rates, but to these ETFs’ credit, they have been mostly steady in recent weeks.
That could be a sign that investors do not need to abandon homebuilders equities and the aforementioned ETFs if the Federal Reserve proceeds with raising interest rates following its December meeting.
The index of builder confidence hovered above 60 in July and June, and it has remained positive for the past year. The positive reading is adds to a number of promising indicators in recent months. For instance, the National Association of Realtors said sales of existing homes in June surged to their highest since February 2007. [Home Sales Hit Eight-Year High, Boost Homebuilders ETFs]
In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home. [Factors That Are Holding Back Housing, Homebuilder ETFs]
On the other hand, housing industry experts also argue that higher rates reflect an improving economy and wage growth, which could also help the housing market in the long run.
We looked at the correlation between Fed tightening and 30-year conventional mortgage rates. So a 25-basis-point move by the Fed would probably lead to 30 basis points of inflation on a 30-year conventional mortgage. If we assume that the current rate rises by 30 basis points from 3.9 percent to 4.2 percent, it’s only an extra $50 [per month]for the average house sold today,” RBC Capital markets analyst Robert Wetenhall said Monday on CNBC‘s “Trading Nation.”
Still, some market observers are worried that the rising mortgage rates could dissuade borrowers to move into new homes.
U.S. home prices are steadily rising to pre-crisis conditions and are back at 2005 levels. Supporting the rising prices, the U.S. housing market may be moving closer to a shortage as the number of available homes for sale dips to its lowest in over a decade.
While many millennials have been forced back to live with families since the recession, Sløk believes that the trend may be reversing and could lead to an increase in housing demand. Moreover, the group of millennials are experiencing a recovery in employment, with the employment rate of people age 25 to 34 back to pre-crisis average, which will also help foster housing demand.
iShares U.S. Home Construction ETF
