Homebuilder ETFs Climb On Thin Foundation As Permits, Sentiment Slide

Homebuilder ETFs posted modest gains Wednesday after a slight uptick in housing starts, but the rally may prove short-lived.

During Wednesday afternoon trading, both the iShares U.S. Home Construction ETF (BATS:ITB) and the SPDR S&P Homebuilders ETF (NYSE:XHB) gained over 1%. Markets are possibly applauding May’s 0.4% increase in single-family housing starts. However, a deeper look shows cracks forming:

• Building permits fell 2.7%
• Builder sentiment hit a 2.5-year low
• And mortgage rates remain near 6.8%.

These warning signs suggest structural headwinds ahead, with ETFs potentially facing renewed pressure if affordability doesn't improve and new construction momentum stalls.

Also Read: Warren Buffett’s Real Estate Business Sounds Alarm: ‘Overpriced’ Homes Need Reductions

Homebuilder ETFs: Ride A Brief High?

Fewer building permits, a leading indicator of construction activity, and the lowest builder sentiment in two and a half years suggest a slowdown.

While homebuilding starts indicate what’s currently being constructed, permits indicate what’s coming down the pike, and currently, what’s coming down the pike may be less.

ITB has heavy exposure to large U.S. homebuilders, including: D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM). This ETF is extremely sensitive to current housing trends, as it is still off about 8% year to date.

XHB, with a more diverse mix of housing stocks, ranging from builders to furnishing and materials suppliers, tracked the advances but still trails broader market indices.

Simply put: construction momentum is leveling off. A declining permit number generally translates into fewer future starts. And the ETFs have been losing steam quickly this year, with ITB down more than 13% and XHB down 9% this year so far.

Confidence Cracks And Cost Pressures

National Association of Home Builders (NAHB) says builder sentiment for June fell to its lowest level since late 2022, per Reuters. Close to 37% of builders said they had provided price discounts or buyer concessions, a sign of slowing demand. High mortgage rates, sitting at around 6.8%, are also stressing affordability and holding potential buyers at bay.

For ITB and XHB ETFs, that will happen at the expense of short-term pops being trumped by long-term structural headwinds, particularly if the Federal Reserve takes its time cutting rates and supply costs stay high.

Investors must be cautious. The three factors — falling permits, declining sentiment, and still-elevated borrowing costs —could make this 1% rally a head fake.

Without a sustained fall in mortgage rates or an improvement in permitting, homebuilder ETFs will continue to be under pressure.

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