Weak Housing Means Recession Coming
Every body will tell you that the economy is still strong. Look at the low unemployment rate! Look, there are more jobs than job openings! Look, inflation is skyrocketing because the economy is strong! But our job as investors is to look to the future and see where the economy and the market is going not look to the past like these people. All the factors they are mentioning are lagging indicators of the economy!
So what is happening now and how do we take advantage of it?
The largest sector of the economy is housing. Where housing goes is basically where the economy goes.
A week housing market means that the economy will be weak and a weak economy means that housing will be weak. We have embarked on a vicious cycle that will only end when we reach the bottom of a recession which won’t be until next year.
Why is housing going to drop sharply when it is so strong now?
In a nutshell, the chart above shows the problem. Housing affordability is dropping sharply. Why? Two reasons.
First, the price of housing has literally skyrocketed. I’m not exaggerating. We are seeing housing prices climbing by over 15% over the last year across the US and over 25% in some locations.
Second, the Fed is hiking interest rates. But, so far, they have only hiked a little bit though they say they are going to hike by 50 bp in each of the next two meetings. That still leaves mortgage rates at low levels compared to the long past. But the problem is that mortgage rates are also skyrocketing compared to the near past. That shock of sharply higher rates is what causes people to stop and think before buying a house.
So far, they are not stopping from borrowing money but they are shifting from the fixed rate mortgages to the adjustable rate mortgages which still have much lower rates than fixed rate. So that will keep the housing bubble from totally bursting right now.
But the shift to ARMs has its own problems.
People are buying houses that they think they can afford because they are getting a low rate on the ARM. But the Fed is raising interest rates so the low rate they got will disappear leaving them with a house they may not be able to afford. We saw the ramifications of that back in 2008.
Now, all this takes time to work through the economy. This is a process that will take 1-2 years to move to fruition.
So how do we make money from this?
First of all, don’t worry about making money. Worry about your housing situation first. Then worry about making money.
We are not going to see another 2008 but we will have the lite version of it.
But what it means that housing stocks will lead the decline of the housing sector. Stocks lead reality so stocks will lead the housing industry.
So I am already short housing ETFs right now. I anticipate working my short operations for the next year. That should mean that I make a lot of money on these operations. Typically, the longer the trend the more price movement and the more price movement the more money I make.
The big money is made on the big move and housing stocks are in the midst of a big bear move.
The easy thing to do is to short XHB. The better thing is to short individual housing stocks.
There are many to chose from like LEN or PHM or whatever. Pick the weakest to short.
Good bear market trading,
Courtney Smith
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