Market momentum is green… barely. Be very careful. Each month, I do a deep dive into a sector. I’ve been an editor at a trading magazine since its inception, and this month the editor assigned me a story about “The Great Outdoors.”
Being the housecat I am, I recommended a story about the housing market. It’s no secret that I’m a tad worried about the American consumer. More and more Americans are taking on credit card debt, mortgage debt, and spending cash like drunken sailors.
I went into my study expecting that the housing market was in some massive bubble. I don’t think so anymore. So here’s a trade that I’m recommending on housing. I know. It’s contrarian. But this is how you trade in a bear market.
The Numbers Are Interesting
Someone told me the other day that I know a lot… I would hope so, given my academic pursuits. But the reality is that I don’t know way, way more. Think about everything you know… and then realize that it’s probably a drop in a bucket compared to things you don’t.
So, I went into this study with assumptions. I assumed that consumers were underwater. The income-to-housing payments ratio is the highest that it’s been since 2006. However, people are making payments.
The 90-day delinquency level has declined for seven straight months. And homeowner occupancy rates are at their highest level since the Census started tracking that data in 1956. But here’s something else that I didn’t know…
The U.S. housing market has been in a staggering shortage of homes for ten years.
Back in 2008, we had an oversupply of homes. At the time, former Federal Reserve Chairman Alan Greenspan suggested that the U.S. government buy all the excess houses and burn them down to bring the market back to equilibrium.
The Housing Crisis
But after the crisis, many homebuilders went out of business. The labor in the market retrained for other careers. Those who did survive the housing crisis were slow to increase their output. While this happened, a demographic shift occurred in America.
Millennials were starting to settle down. They had increased demand for homes while the Baby Boomers were looking to downsize and retire to markets like Florida, Arizona, New Mexico, and Texas.
Then, Covid-19 happened. More than one million people have left New York City. People are moving from high tax states to cheaper locations across the Sun Belt region. So a person who pays outrageous home prices in New Jersey and New York – plus the high income, sales, and real estate taxes – will be very flush with cash when buying a similar-sized home in Florida and Texas.
So yes, home prices have gone up across the nation thanks to the Great American Move that transpired over the last two years. But the market … is still short on supply.
In a stock market with robust supply and demand, we would see about six months of inventory in a market with balanced supply and demand. Today, we have less than two months of inventory available. So, yes, inventory is increasing, but this is still a healthy market.
Anyone suggesting that we have a 2008-style meltdown in home prices is likely suffering from a recency bias that will fear anyone who was burned the last time by the great collapse.
What could happen? Well, a 10% correction is more likely to happen. With inflation rising over the next decade – largely thanks to Environmental, Social, and Governance (ESG) factors and higher energy prices – homes should sustain their value, especially throughout that 15- or 30-year mortgage.
How to Trade Housing Right Now
We’ve had a spectacular pullback in the markets. But despite a robust shortage of homes that might run in the five-million-dollar range, housing stocks are already trading like we’re in a recession.
The SPDR S&P Homebuilders ETF (XHB) is off more than 25% to start. In this market, I ask a fundamental question. What is anything worth? So, in conversations with my father-in-law, we discuss the liquidation value of companies. And Beazer Homes (BZH) is currently trading for 66 cents on the dollar.
BZH is worth far more than its current price in an environment where consolidation is likely to happen. The reality of the markets is that too many investors and traders haven’t caught on that real, tangible assets – land, commodities, homes – will dominate the market in the next decade. In an inflation-driven environment, we must focus on what we need – not what we want.
Now, you could buy Beazer stock today at market price. Or you could sell the August $15 put for nearly $1.00 (or a spread). In that case, you’d be buying the stock… for roughly $14 per share.
In the words of Danny DeVito in Other People’s Money… what a sale. I’ll talk more about this company next week.