AFAICT, luit is actually a runtime requirement for xterm, not a BuildRequires. Now that luit is split out as separate package (see Bug 1933934) it's no longer "guaranteed" to be installed, so xterm is bound to fail using it.
Previously luit was part of xorg-x11-apps which was likely to be installed due to dependencies on other tools within that package.
A koji scratch build moving luit to Requires succeeded fine:
Turns out there's a configure time check for luit so I left it in the BuildRequires - ETIME for fully tracking this down to see if it can be removed but right now my guess is "no". Requires: luit added now inxterm-367-2.fc35.
FEDORA-2021-3df7a4f74b has been submitted as an update to Fedora 35. https://bodhi.fedoraproject.org/updates/FEDORA-2021-3df7a4f74b
FEDORA-2021-3df7a4f74b has been pushed to the Fedora 35 stable repository.
If problem still persists, please make note of it in this bug report.