Chasing bubbles is a dangerous game. Chasing a housing bubble is barely a game.
The Case for a Housing Bubble
On CNBC’s Fast Money, Tim Seymour led a segment called the “Mother of All Housing Bubbles.” I expected Seymour to make the case for shorting housing-related stocks. As a perma-bull on the housing market, I was looking to gauge the timing for the next big dip. However, Seymour instead made a case for chasing the housing bubble higher. Seymour corrected host Melissa Lee to say he does not think housing is currently on shaky ground, but at some point this market will end badly. The mother of all liquidity and credit bubbles is driving the current housing boom. As a result, Seymour used the term “bubble” to describe a housing market featuring near zero interest rates and a mass rush for the suburbs.
The Housing Bubble Trade
By claiming “this is an extraordinary trade, and it still has a ways to go”, Seymour encouraged viewers to chase the bubble higher. He did not give guidance on how to determine the end of the trade.
Seymour did not recommend buying home builders. He focused on companies that benefit from the overall housing market (company descriptions from Yahoo Finance):
- Carrier (CARR) – provides heating, ventilating, and air conditioning (HVAC), refrigeration, fire, security, and building automation technologies.
- Masco (MAS) – designs, manufactures, and distributes home improvement and building products
- Trane (TT) – provides climate control solutions for buildings, homes, and transportation.
- Whirlpool (WHR) – manufactures and markets home appliances and related products
These stocks do not offer bargains. CARR trades at 153% above its March low. MAS is 113% above its March low and at an all-time high. TT is 64% above its March low. WHR soared 169% off its March low. With the exception of WHR, these stocks trade just off recent highs which are in turn all-time highs. WHR hit a 2 1/2 year high before pulling back as much as 8.7% to current levels.
More troubling is that history does not support buying these stocks at the edge of a bubble. The housing bubble peaked in 2007. The bursting of the bubble was fully evident by 2008. Each of the stocks that traded at that time peaked along with the peak of the bubble. Whirlpool managed one last gasp rally into the peak. However, Masco was already in a 2-year decline. Trane suffered a crushing 48% decline one week in August, 2005. The stock took almost 12 years to recover.
In other words, if the housing market is truly in a bubble, then traders and investors are likely much better off running in the other direction. This kind of history is not one for getting “cute” with market-timing. At best a trader should develop a pairs trade with options. For example, a lower risk hedged play could consist of going long an index like the iShares Dow Jones US Home Construction Index (ITB) or the SPDR S&P Homebuilders ETF (XHB) and buying longer dated put options on an individual stock (the more expensive, the better).
Getting Back to Housing Seasonality
Having said all that, I do not think the housing market is in a bubble. Credit is plentiful, but it is not over-extended. Banks remain uninterested in home buyers with low credit scores. Home builders are constantly bragging in their earnings reports about the high credit scores of their customers. These kinds of buyers will not be forced out their homes if prices take a sudden plunge.
I also like housing as an important hedge against inflation. With the Federal Reserve committed to printing what it takes to prop up asset prices, rents over time will continue spiraling higher in desirable markets. Under these circumstances, economic security comes with buying a home, especially at ultra-low interest rates.
Still, I am startled by the enthusiasm for buying a home in the middle of a deep recession and pandemic. Sustained high levels of employment imply that the housing market has a tight cap on it. Once pent-up demand exhausts itself, the void will stare down a stagnant economy. That moment could usher in a subsequent slowdown in housing.
For now, I am inclined to return to the seasonal strategy of trading home builders. I now look forward to the October/November launch of the seasonally strong period for the stocks of home builders as the time to restart an accumulation of home builder stocks.
Be careful out there!
Full disclosure: no positions