The U.S. housing market is sending up fresh warning flares. With borrowing costs still hovering near 7%, buyers are stepping back, and that could spell trouble for homebuilder ETFs.
New-home sales plunged 10.5% month-over-month in July to a seasonally adjusted annual rate of 607,000, according to the latest data. That's a sharp miss against economists' expectations for a 1.4% decline, and it marks the lowest pace in six months. Excluding January, it's the weakest reading since November 2022, as The Kobeissi Letter highlighted on X.
The tweet from The Kobeissi Letter put it bluntly: "US housing demand has collapsed." The post noted that new home sales have now fallen in three of the last four months, painting a picture of a market that's losing momentum fast.
Meanwhile, 30-year mortgage rates are still hovering near 7%, keeping affordability out of reach for many would-be buyers. That combination of weak sales and high rates is a double whammy for the housing sector.
Homebuilder ETFs Face a Tougher Backdrop
This deterioration puts homebuilder ETFs squarely in the spotlight. The SPDR S&P Homebuilders ETF (XHB) offers broad exposure to the entire U.S. housing ecosystem, from builders to building products companies. The iShares U.S. Home Construction ETF (ITB) takes a more concentrated approach, focusing specifically on homebuilders.
Why does this matter? Because weaker sales today can translate into slower construction tomorrow, reduced orders for building materials, and pressure on builders' margins and earnings expectations. It's a chain reaction that starts with a buyer deciding to sit on the sidelines.
The mortgage market is already flashing caution signs. The Mortgage Bankers Association, as cited by CNBC, reported that total mortgage application volume fell 1% last week. Purchase applications slipped 0.3% and are running 5% below year-ago levels. Refinance applications dropped 2% for the week and a hefty 17% year-over-year.
Joel Kan, MBA vice president and deputy chief economist, noted that purchase activity was down over the week, adding that the purchase market has also slowed over the past two months, according to CNBC. That's a clear signal that the slowdown isn't just a blip; it's a trend.
Rates Remain the Key Variable
The average 30-year fixed mortgage rate for conforming loans rose to 6.78% from 6.77%, hitting its highest level in three weeks, according to the MBA. That's still uncomfortably close to 7%, and it's keeping pressure on affordability.
Investors are now watching whether mortgage rates can move decisively lower. Mortgage News Daily reported that rates eased this week as falling oil prices pushed Treasury yields down. A sustained decline in yields could provide some relief to housing demand, but if rates stay elevated, housing-sensitive ETFs could face a more difficult earnings environment.
Where Investors Could Look Instead
For those looking to reduce direct housing exposure, there are alternatives. Shorter-duration fixed-income ETFs like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares 1-3 Year Treasury Bond ETF (SHY) offer a safer haven with less interest rate risk.
Another option is the iShares MBS ETF (MBB), which provides direct exposure to agency mortgage-backed securities. This ETF could be particularly interesting as mortgage rates and Treasury yields fluctuate, offering a way to play the housing market without the direct equity risk.
For now, the housing data suggests that the 6.8% mortgage-rate environment is becoming increasingly difficult for buyers. If the slowdown deepens, housing ETFs could be one of the most important areas to watch. The question is whether rates will ease enough to bring buyers back, or if the market is in for a longer stretch of weakness.
