Homebuilders are entering a difficult period
From April 2020 until today, we’ve seen very good performance from the construction sector, particularly the home builders industry.
If we drill down even more, the high demand was driven by rural houses.
Basically, people want to escape the city's covid restrictions mania and move to a rural area where they have more freedom.
The biggest monetary stimulus ever makes this situation possible.
But all of this is old news.
Now let’s look forward
Here we have the US building permits as the leading indicator.
As you can see the peak was in January 2021, after January we are at stagnant levels.
The biggest monetary stimulus not just “stimulates the economy” but also inflates the commodities prices. Now the blessing becomes the curse.
At the moment of writing this letter, the biggest problem for the homebuilders is high commodities prices.
The current situation is:
- We have a big rally from homebuilder stocks from April 2020 until May 2021
- Pressure from commodities prices
- Demand has peaked
Now let’s take into consideration 2 scenarios
1.The monetary stimulus will continue (less realistic)
If the stimulus will continue the pressure from commodities will increase.
Demand will drop.
2.The monetary stimulus will end in the second half of 2021
If the stimulus will end the commodities prices will come back to normal levels and the homebuilders will not have to deal with elevated commodity prices.
Because monetary stimulus will end the demand will slow down at least for some time.
If we think a step forward at the possibility of the FED raising interest rates to control the inflation, then the slowdown thesis will be more dramatic as well.
In my opinion, we do not need to see the rise in interest rates in order for the slowdown to happen.
From April 2021 the stock market has been in an uptrend.
The market expectation is that the monetary stimulus will end in the second half of 2021. What the consequence of this will be?
Nobody knows for sure. But what we know is that the stock market does not like uncertainty.
If you are not sure what will happen take some money off the table.
Now regarding the homebuilders, in my opinion, they are in a tough spot right now.
I can not paint a good picture for them in the second half of 2021.
They need a stable environment to operate. With rising commodity prices and the possibility of raising interest rates, the environment does not look stable at all.
I also saw a Bloomberg article about construction startup Katerra Inc shut down, I do not make a cause for a doomsday scenario but I think it’s worth sharing.
Until we have a stable environment I am short homebuilders.
As a disclosure, I am short a homebuilder stock.