Options Arena: Can’t Buy a Home? Trade This
When it comes to the insane surge in house prices over the past few years, you likely fall into one of two camps…One, you’re a young person who’s finally stashed away enough for a down payment on a mortgage — or so you think. As you search, you’re finding that even the most humble of abodes get snatched up by an all-cash bid at 20% over the listing price. Or two, you’re a homeowner, and all the fear you felt when you initialed countless sheets of legalese has melted away into sheer exuberance, as your home rockets in value day by day. Whether you’re frustrated or delighted by soaring prices, though, one thing’s for sure: it provides us with plenty of trading opportunities… So I put it to our True Options Masters this week — what’s the stock-market way to play this red-hot housing market?
Amber: Cheap Options That Should Double No Matter What? Sign Me Up…
Homes are a market, just like stocks. The principle of “supply and demand” applies to both. When demand exceeds supply, prices rise.According to the National Association of Realtors, “The gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021.” At the current pace of construction, it will take more than five years to build enough homes to meet demand. This lack of supply justifies high home prices. And there’s no reason to expect the direction of the trend to change. There simply aren’t enough homes for all the potential buyers. There’s no easy solution to this problem. But there are trade opportunities. Homebuilders are an obvious one. But new homes are more expensive than existing homes and are out of reach for many, if not most, households. A better trade is mortgage companies like Rocket Companies, Inc. (RKT). Mortgages were at the center of the housing crisis almost 15 years ago. Traders are now worried they will be at the center of the next storm. That means the stocks are reasonably valued — a rarity in the current market. RKT is cheap, less than $10. Long-term calls are even cheaper. The Jan 2014 $10 call is trading at about $2.20. Whether home prices rise or fall, these options should double.
Chris: Don’t Fight the Trend — Buy Where Young People Are Going
I have to confess — I’m one of those guys who’s been checking his home’s value way too much lately. I need SOMETHING to cheer me up after all my recent losses in the stock market.I got lucky. I bought my home in Feb. 2021 before prices started going vertical. If I was buying today, I don’t know if I’d be able to. At least, not in Palm Beach, FL. My advice to millennials? Move. There are good deals out there. They’re just not where you live. My plan over the next couple of years is to buy rental properties in cities I’m beginning to see young people move to. I like Ft. Myers, FL. It has a charming, quiet downtown that feels like something out of a Hallmark movie. And the people are all incredibly friendly. I also really like Beaufort, SC. It’s tucked away in between Savannah, GA and my hometown of Charleston, SC — both of which have been booming recently. Beaufort also has one of those charming downtown areas. When I spoke to realtors there, they said they’re trying to keep the big money out … to me, that’s a massive tell. Remember, Michael Burry started shorting the housing market in 2005 and his position went way under before the market started to finally sink two years later. That just goes to show these trends can persist longer than people think. Believe it or not, there are still good deals out there. Speaking of real estate, we have a new report on this in a package we’re putting together for Mike Carr in May. Keep your eyes peeled…
Chad: Prices Don’t Lie — and They Say Be Bearish on KBH
I honestly don’t know what to make of it all.All I know is prices don’t lie. And KB Home (KBH), one of the largest U.S. homebuilders, is drifting lower. The homebuilders stock peaked in May 2021, just over a year ago. At the lows in early April, it was down over 40%. It’s trading 13% below the pre-pandemic top — just before the housing market went nuts. This doesn’t scream a strong housing market to me… In the chart below, you’ll notice the colors of the candlesticks have just turned green. This indicates it’s in the leading quadrant on my Profit Radar. By studying this Profit Radar, I know stocks tend to rotate through four phases of the market: leading, weakening, lagging, and improving. Each in that order. Since this stock is in the leading sector right now, the weakening and lagging sections that follow could easily send this stock under $30 in the months ahead. Don’t fight the trend. Buy puts on KBH.
Mike: If People Won’t Move to Homes, These Companies Will Bring Homes to Them…
The problem with housing was foretold by the economist Tyler Cowen. He describes the problem as complacency.but this is a myth. According to Cowen, the average person has become satisfied with where they are. They’ve grown risk averse. This means they’re reluctant to switch jobs or move to another state, among other things. There are plenty of available homes — they just aren’t where potential buyers want to be. Nationwide, 9.7% of existing homes are vacant. Some are vacation-worthy homes. Others need some work. But there are at least 4 million vacant homes scattered around the country that are available. You can see some of them here. An obvious solution is for people to move where the homes are. But because of risk aversion, this is unlikely to happen. The key to getting more homes where people want them is construction, and regulation makes that difficult. Many communities adopt a NIMBY attitude to construction: “Not in my back yard.” Existing homeowners don’t want new homes to lower the value of theirs. So there’s little incentive for communities to make it easier to build. There isn’t a quick solution to this problem. It takes time to change attitudes toward construction and make changes to zoning rules as needed. Then it takes time to build. The solution also requires alternatives to traditional single-family homes. One alternative is manufactured housing. These are less expensive homes that can be delivered quickly. Some of the profitable companies in this sector include Legacy Housing Corporation (LEGH) and Nobility Homes, Inc. (NOBH).Many people think we live in the time of the “Great Resignation” where everyone is quitting,
These are small-cap stocks with illiquid options. Trading the stock could be the best choice here.
You’ve heard it all! Which of our experts have the best take on soaring housing prices?voting in the poll below…Let us know by
Have a topic for Amber, Mike, Chad, and Chris? Send ‘em our way at TrueOptions@BanyanHill.com to be featured in our next round of Options Arena!
Regards,Mike Merson Managing Editor, True Options Masters