The strengthening homebuilder sector exchange traded funds could hit a snag as slowing home sales and a tight labor market weigh on the industry in the second half of the year.

Year-to-date, the SPDR S&P Homebuilders ETF (NYSEArca: XHB) increased 29.5%, iShares U.S. Home Construction ETF (NYSEArca: ITB) advanced 28.9% and Invesco Dynamic Building & Construction ETF (NYSEArca: PKB) jumped 31.4%.

Homebuilder stocks have rallied as interest rates pulled back this year, reducing the cost to borrow for many would-be homeowners. The 30-year mortgage rate declined to 3.75%, its lowest level in over two years, the Wall Street Journal reports.

The boon of low rates “has been apparent in the strong mortgage demand data and will in all-likelihood be reflected in improving home sales data this summer,” Alex Pettee, president and director of research at investment advisory Hoya Capital Real Estate, told the WSJ.

The favorable environment for home buyers helped improve homebuilder sentiment and caused some analysts to upgrade companies like Lennar Corp. Furthermore, the industry has benefited from falling lumber prices.

However, the National Association of Home Builders revealed that builder confidence declined from May to June, with confidence now lower than it was at the same time last year. Builders warned of increased construction costs, a labor shortage and trade tension with China, which is a major source of materials.

Analysts also highlighted disappointing sales figures during what is typically the most robust time of year. New home sales declined 7.8% between April and May, falling off almost 36% on the West Coast. Meanwhile, sales of existing homes rose last month but remained below 2018 levels, and single-family housing starts also dropped by more than 6% in May.

Looking ahead, after the spring selling season that accounts for more than 40% of annual sales revenue for many builders, Kenneth Leon, global director of industry and equity research at CFRA, argued that we should expect further earnings declines.

“Expectations are going to be less and that will factor into perhaps lower revenue and lower earnings estimates,” Leon told the WSJ.

For more information on the housing market, visit our homebuilders category.

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