November 13th, 2021
The Hidden Indicator Warning that we’re in a Housing Bubble
Dear Retail Investor,
Like the legendary Yogi Berra once said, it’s déjà vu all over again.
Flash back to 2005.
I was leaving the house of a friend I was staying with in the tony town of Healdsburg, California.
As I walked out the door, two young women dressed to the nines approached me.
“That’s a nice house,” one said.
Before I had a chance to say it wasn’t mine, the other chimed in with, “If you’re ever looking to sell, let us know – we have a lot of buyers waiting for homes like this.”
Then she handed me her card.
It was, of course, a card for a real estate company.
And these women were canvassing the neighborhood hoping to procure some listings for it.
During this period, housing prices in the U.S. were exploding.
This was especially true in the Bay Area of California, where Healdsburg’s located.
To wit – my friend who owned the house I was staying at had paid $200,000 for it four years before.
It was now worth $500,000 and going up in value practically every day… as was every other home in the neighborhood.
We all know what happened a couple of years later – a real estate crash for the ages… one that almost destroyed the American financial system.
Now in 2021, I fear history may be repeating itself.
The reason – a little known illness has infected the market, just like it did in 2005.
There are no segments about it on the news.
No financial analysts are talking about it.
In fact, most are oblivious to it.
There’s no official name for it either, but I call it the “Mad Home Disease.”
How Mad Home Disease spreads
It starts with homebuyers.
Then it spreads to realtors, and from there to homebuilders.
It’s a vicious cycle that repeats over and over again until the disease has run its course.
At that point, many of the infected are left with devastating losses… not to mention unprepared retail investors.
It all begins when homebuyers start bidding up housing prices to a stupid extent.
That’s routinely happening across America today.
That’s certainly true in the Florida Panhandle town where I’m hanging out right now – a sleepy little settlement called Santa Rosa Beach.
The couple I’m renting an Airbnb from here tells me that to have any chance at nabbing a listed home in their area, you have to bid at least 10% over the asking price.
Result – homes here are turning around much faster than normal.
This is true throughout the U.S., where the average time it takes for a listed home to sell is 43 days.
This heated demand, of course, has depleted housing inventories… a development that’s infected the nation’s realtors with Mad Home Disease.
Now, sick with a desire to maximize their commissions, they’ve ramped up their direct mail and canvassing campaigns in the hunt for new listings.
How Mad Home Disease spreads to homebuilders
Not wanting to miss out on profiting from desperate homebuyers, Mad Home Disease incites homebuilders to ramp up production.
That happened to a dramatic extent earlier this year, when housing starts soared 37% on a year-to-year basis from March 2020 to March 2021.
Of course, now we have an acute shortage of labor and materials, which caused an unexpected drop in homebuilding in September.
That means there are fewer homes available to buy today than there otherwise would be.
This shortage is adding to the desperation of infected homebuyers, who now have fewer houses to bid on.
So they’ve responded by upping their bids.
What the Street says about this situation
Most financial analysts don’t see a problem here and believe we’re in no danger of a housing meltdown.
Here’s a snippet of their logic…
- Interest rates remain at historic lows
- Attractive long-term fixed mortgages remain available
- Millennials are starting families and prefer single-family residences over apartments
- Expectations of inflation are rising, so homeownership will serve as an inflation hedge
- The work-from-home trend will continue giving workers the option of leaving urban areas and buying residences in more affordable, family-friendly markets
These points make sense on paper.
But there’s a law in physics that can’t be ignored – what goes up must come down.
That will happen when wanna-be homebuyers recover from Mad Home Disease.
In other words, that will happen when they come to their senses and stop overpaying for houses.
How and when this goes down isn’t exactly clear.
Maybe the catalyst will be the (inevitable) resolution of the labor shortage and supply chain issues plaguing homebuilders.
Perhaps, as more and more homeowners sell their houses, inventories of homes will finally catch up with demand and drive prices down.
Or maybe home prices will finally hit a tipping point and homebuyers will say, “Enough!”
Then there’s the Fed…
If they ever decide to raise interest rates, look out below.
How to prepare for the end of Mad Home Disease
If you own a home and are thinking of selling, you can profit from today’s housing madness by cashing out now.
If you’re thinking about buying a home, you might want to exercise some patience and wait for the inevitable housing correction.
And if you’re wondering how to protect your portfolio from a housing crash – or even profit from it – you could invest in businesses that historically do well during recessions.
Companies that produce alcohol, home maintenance products and healthcare come to mind.
Mark my words, when Mad Home Disease is finished running its course, housing won’t be the only part of the economy to take a hit.
So keep that in mind as you play the market.
Anyway, that’s it for today.
Contributing Editor, Dear Retail
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