Greetings from Old Orchard Beach in Maine. I’m up in the lovely Pine Tree State with my wife visiting my brother-in-law and we decided to go to spend a few days in the lovely “old school” beach community and, of course, to eat lobster. Lobster rolls, whole lobsters, lobster salad—I’m not picky…
I’ve shared before how expensive traveling has become in this post-COVID lockdown period, where pent-up demand has exploded for anything travel-related. Maine is no exception. Several months ago, I looked up prices to rent a car in anticipation of flying here but a mid-sized rental was going to cost $1,040 for this week! We decided to drive up the coast instead of fly.
I’m sure the price of travel is not the only bubble out there. We’ve already seen several asset bubbles burst – notably lumber and Bitcoin:
Whether inflation is going to remain “transitory”, as the Fed claims, or not, I’m betting overheated prices in some other areas are sure to fall. Over the next few articles, I’ll explore several bubble-bursting possibilities, including today’s topic: real estate.
I know that all my friends in realty and construction want today’s demand and pricing to continue forever, but it will not. Here’s some data showing that pricing now is even crazier than the bubble that ended in 2006:
This chart shows the highest year-over-year increase since Case-Schiller started keeping records.
To get a feel for what sectors have benefited from this demand explosion, I put together this percent change chart – which seems very busy at first. I thought that seeing different areas of the real estate market together could provide some important information. There’s more explanation that follows below:
This chart shows the percent gains since the beginning of 2019 for the following ten real estate and construction-related symbols: HD, TREX, VNQ, IYR, SCHH, XLRE, REM, ROOF, ITB, and XHB.
If you look at the chart, you’ll see three main groups of performance:
- Building Materials: Trex – maker of composite boards, etc. is the highest flyer. Now, it is a bit of an unfair comparison because only two individual stocks are on the chart (HD is the other). TREX, however, does show the strength of building materials during this run.
- Builders and Home Depot: The middle group includes the two homebuilder ETFs and Home Depot – showing how close together this group performs.
- “All Others”: The bottom group includes small cap construction, REITs, and mortgage lenders – the last of those being the poorest performer in the coronavirus drawdown and the slowest to recover. That’s understandable with interest rates so low, but not even the vast increase in volume from new mortgages and refinancings came to their rescue.
Real estate is one of several bubbles that is going to pop at some point soon. What are some of the others? I have a few in mind to explore but first, here’s a request—let me know (via the email below) what current sector or asset bubbles have your attention, and what bubble you expect to pop next.
I always enjoy hearing your thoughts and comments. Send them to me using drbarton “at” vantharp.com
Great trading and God bless you,