America's Real Estate: Facing A Bust

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Includes: CLAW, HOML, ITB, IYR, NAIL, PKB, XHB
by: D. H. Taylor

Summary

Interest rates are heading higher from the Fed's removal of its balance sheet.

Home builders have seriously lagged the economy.

Real estate in general is going to slow over the course of the next 12 - 18 months while the Fed pushes rates higher.

Sell the Home Builders.


For some time, I have been disconcerted about America’s real estate landscape. I have been living in Denver for some time and looking to buy a home. The task is proving to be very difficult. I sensed an huge opportunity for home builders due to a lack of inventory. However, there may be forces at work that are making turning on the housing market. Now, I am sensing that economic forces are going to take over; the housing market is going to slide lower over the next 12 - 18 months and then meander in low gear for some time. This will affect the earnings of the home builders.

Housing starts are starting to come down from higher levels. This is the most recent release of US Housing starts for the month of May:

But, if you take a closer look at the housing market from a bigger picture, you can see what I am looking at and how there is an affect on the housing market:
US Housing starts are coming off of their recent highs. But, as this graph shows, those recent highs pale in comparison to recent highs from the early 1960s onward. The average housing starts was 1,437 from 1959 to 2017. This current cycle hasn’t even hit the average and it is already sliding.

I see the market sliding more going forward for a few reasons. The biggest reason is that interest rates are heading higher. Right now, the 30-fixed mortgage is 3.91%. As this chart shows, the trend is downward: