Homebuilder sector-related exchange traded funds could come under pressure as rising mortgage rates and inflation reduce demand for homes.
Year-to-date, the iShares U.S. Home Construction ETF (NYSEArca: ITB) decreased 28.7%, SPDR S&P Homebuilders ETF (NYSEArca: XHB) declined 26.3%, Invesco Dynamic Building & Construction ETF (NYSEArca: PKB) fell 21.7%, and Hoya Capital Housing ETF (HOMZ) was down 13.2%.
Industry analysts warned that U.S. homebuilders will find it harder to raise home prices and could potentially see reduced profit growth ahead due to headwinds like rising mortgage rates and high inflation levels, Reuters reports.
While homebuilders like D.R. Horton Inc, Lennar Corp, and PulteGroup Inc are headed toward a strong earnings season, the U.S. housing boom could be slowing in response to aggressive U.S. Federal Reserve rate hikes in response to elevated inflation levels that are at four-decade highs.
For instance, the rates on 30-year fixed mortgages, the most popular U.S. home loan, are back above 5% for the first time in over a decade. This has made new homes less affordable for lower-income groups and first-time home buyers.
“First-time home buyers are getting a double or even triple whammy right now,” Ralph McLaughlin, chief economist at real estate data firm Kukun, tells Reuters, adding that the rate of price growth should “absolutely cool right now.”
The pace of home prices is expected to cool after housing prices surged since the start of the COVID-19 pandemic. The post-pandemic buyers have opted to upgrade their homes or move out of cities to the suburbs, capitalizing on the low mortgage rates and a shift to a work-from-home environment. Consequently, median existing house prices have jumped 15% year-over-year to an all-time high of $375,300 in March.
Over the past year, homebuilders like D.R. Horton, Lennar, and PulteGroup have reported strong profits on upbeat demand, which allowed many builders to charge higher prices. Looking ahead, the markets will be watching for how these companies plan to adjust to a potential drop in demand and rising costs of construction due to inflationary pressures.
“We expect price increases to slow and buyers in bidding wars to face fewer competing offers,” Redfin Chief Economist Daryl Fairweather says in a report.
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