Is the Housing Market in a Bubble? [Homebuilding Stocks to Watch]

by Options Sensei

The housing market has cooled from its blistering pace of this year’s 1st half. However, demand remains robust with prices continuing to rise. 

So, why have homebuilders, as represented by the iShares U.S Home Construction ETF (ITB), declined over 9% in the past week? 

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Granted, ITB and many individual homebuilders have enjoyed huge gains from the pandemic low.  But, the recent downturn seems less like profit-taking and more like the realization that prices have peaked. 

ishares us home construction etf

Indeed, national home prices, as measured by the Case-Shiller Index, increased 7% to 19% every month from September 2020 to June 2021. 

Significant increase in the new housing inventory

A Tuesday Commerce Department report indicated a significant increase in the new housing inventory — the jump was driven by a record rise in pre-built homes. Builders are taking longer to complete houses, hobbled by expensive raw materials as well as scarce land and workers. 

This analysis doesn’t jibe with the facts on the ground. Lumber prices have returned to pre-pandemic levels and the worker shortage has been alleviated as expanded benefits roll off. Homebuilders are reportedly turning away buyers as they attempt to reduce the backlog of sales.

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Sales of new U.S. single-family homes increased in July after three consecutive monthly declines.  But, housing market momentum is slowing as housing prices surge.

However, July may have proved a peak as forecasted new home sales. It account for 10.6% of them, dropped 27.2% on a year-over-year basis that same month. September reports reveal that single-family building permits fell in July, while confidence among homebuilders hit a 13-month low in August. 

A home’s affordability is just one factor in the ownership equation.  Taxes, upkeep, insurance, and utility are just a few of the overlooked costs. I think many new homeowners who spread their wings to have more space and land, will be shocked at the bills coming due this winter.  Natural Gas and propane, the two most popular ways to heat a home, have soured by 150% over the past 6 months.  For a typical 2,000 square foot home, that could amount to $700 in utility and heating bills. 

us 12 month natural gas fund

Another factor that might dampen homebuilder prospects is the great migration from cities to suburbs/exurbs; driven by the pandemic and the ability to work from home’s waning. 

NYC landlords can jack up rent prices back up

A Bloomberg article indicated that NYC landlords can jack up rent prices back up — to the tune of 50%-75% — as both young and older people become enamored with the city life once again. 

I don’t think housing is in a bubble. But, it does need to digest the incredible gains of the past 18 months. Once supply starts to meet demand and input costs come down, I think the sector could be a buy. 

The two names I’m watching closely are Toll Brothers (TOL) which has a portfolio focused on urban areas and Beazer (BZH) which targets entry-level and first-time buyers.  

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