The housing market is in a bubble!

Housing prices are set to fall by 30-50%!

Higher interest rates are going to kill the housing market!

You’ve likely heard one of these claims in the last year.  Regardless of which analyst or media outlet you follow, the claims have been out there.

if you are listening to those analysts, as the majority of the investing public will, you’re going to miss out on some serious profits.

to be more exact, I am eyeing up a trade that could hand you a quick 100% under the right conditions 

Sure, there will be a slowdown or even a decline in the housing market, just not now.  

Even better, there are still opportunities for both investors and traders in this sector.  I’ll show you a few in just a minute.

How do I know? 

It all goes back to yesterday’s discussion about the psychology of the markets.  Here’s the link if you didn’t catch it.

The housing stocks are playing right along with this little-known incredibly powerful view of the market.  I call it Behavioral Valuation, but for our purposes, we’ll keep calling it the Psychology of Trading.

Let me make something clear right now.  

There is a difference between the housing market and the commercial real estate market.  

We’re going to dive into the commercial real estate market tomorrow and it won’t be pretty.  Today, it’s all about the residential side of the market.

Let’s start with a few facts.

Year-to-date returns for the S&P 500 and the Nasdaq 100 are 15% and 38% respectively.  Everyone knows that the Nasdaq has led the way because of those seven to ten “bright stars” in the index.  Companies like NVIDIA Corp. (NVDA) [click here to see how I’m investing in NVIDIA for the long haul], Microsoft Corp (MSFT), Alphabet Inc. (GOOGL), and Apple Inc. (AAPL) are on fire.  

And the market is paying attention to them, almost too much.

What I mean by that is that the Nasdaq 100 has become one of the most crowded trades on Wall Street.  Everyone is bullish on most of the companies in the index.  That’s an indication that the Nasdaq 100 is in the “euphoria” stage and more at risk of a selloff soon.

The Nasdaq 100 gains are amazing.  But just as amazing is the 35% gain that the iShares US Home Construction ETF (ITB) has made for the same period.

That’s right, ITB is trailing the hottest index on Wall Street by just three percent.  But nobody is talking about it.  Let me correct that, The Street is talking about it, but they are telling us that the sector is a bubble getting ready to burst.

In case you weren’t aware, the Home Construction ETF is made of up companies like DR Horton Inc. (DHI), Lennar Corp (LEN), Tri-Pointe Homes Inc (TPH), and other companies in the homebuilding industry.

These stocks are on fire.  And the good news is that they aren’t flirting with the Euphoric stage of their rally yet.  This means that they have room to move even higher.  Here’s why.

First, the fundamentals.

We’re seeing earnings from the homebuilders beat expectations.  Unlike last quarter, the homebuilders did not see a drop in analysts’ expectations.  That means these companies are operating at a stronger fundamental level than most others in the market.

Remember, inventories are still low when compared to demand.  That simple factor indicates that housing prices should remain robust and continue to grow over the next six months.

That fact is resulting in the homebuilding stocks providing positive earnings guidance.

Last quarter, most companies in the S&P 500 provided lowered revenue guidance.  It’s a sign that companies think they’re still going to see headwinds.

That wasn’t the case with the homebuilders.  Many home builders are increasing their revenue guidance as demand for housing remains strong.  

Just this week, Zillow announced that there are now 40% fewer homes on the market than just before the pandemic.  That’s a sign that inventory is still thin and in need.

Take Lennar for example.  The company reported results on June 15.  For the quarter, Lennar beat The Street’s revenue and earnings per share targets.  On top of that, Lennar raised its earnings guidance from $2.71 to $3.35-$3.60.

The analysts now have the job of raising their targets, which will drive more investors into this and other homebuilding stocks.

From a sentiment perspective, the homebuilders still have room to climb. 

I’ve already mentioned that the market has been calling for the demise of the housing sector for more than 6 months.  

That’s a simple sign that these stocks are climbing up a “wall of worry”.  

Subjective proof that the housing stocks are not in the “euphoria” stage of their rally.  Instead, these stocks appear to be in the “disbelief” stage.

The analysts are projecting the same sentiment.

I track the percentage of buy, hold and sell recommendations for each sector.  This gives me a quantified measure of whether the analysts are “euphoric” towards a group of stocks.

Currently, 48% of the analyst recommendations in the Homebuilder’s sector are “buys”.  35% of the recommendations are “sells”.  Compare that to the Nasdaq 100 and you’ll see where the optimism trade sits. 

Sell recommendations for homebuilders are double that of the Nasdaq 100.  That’s a sign that there is significantly more pessimism towards the sector.  This sentiment usually “unwinds” as the analysts upgrade the stocks based on their fundamental and technical performance.  Something the Homebuilders have in spades right now.

This bullish combination of positive fundamentals and technicals mixed with pessimistic sentiment forecasts a continuation of the current rally.

Sure, there could be some bumps and “healthy corrections” along the way for the Homebuilders.  That said, the intermediate-term trend should remain in favor of higher prices.

As a matter of fact, the ITB is preparing to hit some overbought readings within the next week or so.  This simple technical situation suggests that the ETF is likely to see a healthy correction that may bring shares to the $77 price level.  This is one dip that I would buy though.

Here are the two ways I trade this outlook.

Shares of the ITB are hovering near all-time highs.  Put that into perspective.  The white-hot Nasdaq 100 is still 13% from its all-time highs.

Breaking to new highs should begin to unwind some of that negative sentiment as the bears turn to bulls.  This should result in the ITB making a move towards the $95-$100 range.

The simple position is to buy shares ITB at their current price with a target of 15% profit.

For those looking to leverage the move, I consider January 19, 2024, ITB $83 Call option an attractive alternative to the stock.  At its current price of $3.40, the option will move dollar for dollar once the ITB price exceeds $83.  The target price of $95 would result in intrinsic gains of $12.  That would result in a return of more than 100% for the same 15% move in the stock. 

Of course, there are a lot of bullish targets within the 52 stocks that comprise the Home Construction ETF.  I’ll give you a peek at one of them on Friday.

Tomorrow, we’ll look at the “other side” of the real estate market trade by focusing on the Commercial Real Estate sector.

In case you’re curious – which you should be – the commercial real estate market is far from as attractive as the home builders.  We’ll get into it tomorrow.

Until then…


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