Rising mortgage rates and inflation could hamper homebuilder ETFs

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Exchange traded funds related to the housing sector could come under pressure as rising mortgage rates and inflation reduce demand for homes.

Since the beginning of the iShares US Home Construction ETF (NYSEArca:ITB) down 28.7%, SPDR S&P Homebuilders ETF (NYSEArca:XHB) decreased by 26.3%, Invesco Dynamic Building & Construction ETF (NYSEArca:PKB) fell by 21.7%, and Hoya Capital Housing ETF (HOMZ) fell by 13.2%.

Industry analysts have warned that US homebuilders will find it harder to raise house prices and may expect slower earnings growth due to headwinds such as rising mortgage rates and high inflation rates, Reuters reports.

As homebuilders like DR Horton Inc, Lennar Corp and PulteGroup Inc head for a strong earnings season, the US housing boom could slow in response to the US Federal Reserve’s aggressive rate hikes in response to elevated inflation rates peaking at four-decade highs are .

For example, interest rates on 30-year fixed-rate mortgages, the most popular US home loan, are above 5% for the first time in over a decade. This has made new homes less affordable for low-income groups and first-time home buyers.

“First-time homebuyers are taking a double hit or even a triple hit right now,” Ralph McLaughlin, chief economist at property data firm Kukun, told Reuters, adding that the rate of price growth should “absolutely be cooling right now.”

The pace of house prices is expected to cool after house prices have risen since the start of the COVID-19 pandemic. Post-pandemic buyers have chosen to upgrade their homes or move out of the cities to the suburbs to take advantage of low mortgage rates and a shift to a work environment. As a result, average existing home prices are up 15% year-on-year to an all-time high of $375,300 in March.

Over the past year, home builders such as DR Horton, Lennar and PulteGroup have reported strong gains on positive demand, allowing many builders to charge higher prices. Looking ahead, markets will watch as these companies plan to adjust to a potential fall in demand and rising construction costs due to inflationary pressures.

“We expect price increases to slow and buyers in bidding wars to face fewer competing offers,” said Redfin chief economist Daryl Fairweather in a report.

You can find more information about the housing market in our real estate category.

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