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ITB: Homebuilders Are A Value Trap

Ordinary Wealth profile picture
Ordinary Wealth


  • Nominal and real home prices have never been more expensive.
  • Profit margins for homebuilders have remained steady even while share prices have plummeted.
  • The market is right this time, just like it was in 2006, that this is a value trap.
  • A picture is worth a thousand words, but a chart is worth a thousand pictures.

Aerial view of new build housing construction site in England, UK


The U.S. housing market has softened considerably since I last wrote about homebuilders in February. Back then I had four reasons why I thought profit margins for homebuilders were going to get squeezed. It's taken several months, but it is starting

This article was written by

Ordinary Wealth profile picture
Publishes articles on our research and investment portfolio decisions. Focusing on macro economics, total return, dividend growth, and options. Not investment advice. "A picture is worth a thousand words, but a chart is worth a thousand pictures."

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in ITB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This content is for informational purposes only. This content is not investment advice and individuals should conduct their own due diligence before investing. The author is not an investment advisor and is not suggesting any investment recommendations. Opinions expressed in this article are based on the author’s best judgement at the time of writing and are subject to change without notice. Investors should consult with their financial advisor before making any investment decisions.

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Comments (8)

Read your article from yesterday. Then I look at this call. I'm not sure you are assessing the situation correctly
Ordinary Wealth profile picture
@GiantBook builders are doing much better than we expected. But we've been neutral on builders since they started making new highs. In the short term, the market is a voting machine. See our call on residential REITs.
itb/spy pair new multimonth high (itb outperform)
womco profile picture
yes, per Michael , everything I hear and read speaks to a shortage in housing. How does everyone have it so wrong ?
Ordinary Wealth profile picture
@womco They're not wrong per se. There is a shortage of inventory that is actively for sale. But most people live in dwellings, there's not a shortage of square feet. There is a shortage of homes that people want to buy by upgrading, but that desire may be fleeting as incomes suffer from inflation. The millennial population is often cited as a large source of new demand, and they are becoming of age, but they can't afford housing at these prices so its still potential demand, in my opinion. And this does not account for the boomer generation leaving their housing. What matters more is the housing stock growth compared to total population growth. Read my housing article for more. Thanks

Karl Glazier profile picture
Why are rents rising so much? Low vacancies? Is there a rent bubble?
Ordinary Wealth profile picture
@Karl Glazier rents are up because the price of everything is up: we have inflation. Rents tend to follow home prices higher and low rates causes prices to go up. To make matters worse, the eviction moratoriums completely seized up normal market behavior. Eviction filings are rising quickly It will take time but I expect rents to moderate.
Michael Dolen profile picture
@Garrett Duyck Buy everyone says there's a huge shortage of housing. You must be wrong.

I'm being sarcastic.

Population growth is anemic and actually negative, if not for immigration. The only significant difference between 2019 and 2022 is that a bunch of people shuffled locations, which gave the appearance of a shortage in some locations when in actuality, there isn't on a nationwide level. That chart of the real mortgage payment price index says it best. Payments for cars and toys are just as scary.

I don't short but I am putting my money where my mouth is. Has anyone here sold their house to go homeless, with the gamble of waiting for more realistic pricing?

That is what I've done. Sold my oceanfront home in Los Angeles in March. I had purchased the land in 2012 and built it. Currently I'm at my vacation home, a lake house, which is worth less than 1/10th of that beach house. So I have only trivial SFR exposure right now.

As with the GFC in 2008-2009, prices didn't bottom until 2011-2012. I can't wait that long but I see no rush anytime soon. Will ride out the winter with a short term rental in SoCal.
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