ZIRP Is Not Stimulating Home Sales

The homebuilders bounced today along with just about everything other financial investment under the sun after the Fed forgot to put the word “patient” in its FOMC policy statement but indicated that it’s no hurry to raised interest rates even a fraction from zero percent.

Perhaps once again the “tell tale” about housing from the market was the fact that lumber – after dead-cat bounce yesterday – was the only commodity besides the U.S. dollar that fell in price.

Even more telling is the fact that Lennar, the biggest homebuilder by market cap, has announced that it is going to try and turn its slower selling inventory into rentals – LINK.

Lennar’s inventory has jumped 54% in the last two years. For it’s fiscal year that ended in November, its operations generated negative $788 million cash flow. Lennar focuses on the “move up” and retirement markets. The move-up market is freezing up because the first-time buyer is becoming a dinosaur and the move-up seller can’t sell to extinct buyers.

I’ll have more to say about Lennar down the road. But today’s dead-cat bounce in the homebuilders – which was not confirmed by the action in lumber – is a great opportunity to start shorting the sector. My homebuilder reports will help you get started: Homebuilder Research.

ZIRP has not stimulated home sales. The dead-cat bounce in the sector was primarily fueled by the big investment buyers. They are now looking to unload their unleased holdings. Lennar is late to a game (single family rentals) that is quickly becoming overloaded with inventory. SFR is a relatively popular investment that property owners like to make as it has a lot of benefits for both owners and tenants. For tenants, it allows them the added privacy that they desire and for owners, it produces more cash flow. That is why many people prefer to invest in sfr real estate so they can get the most out of their investment.

P.S.: the big institutions and hedge funds have already placed their bets in the homebuilding sector. Just like the big funds that are long homes and are looking for buyers, there will be nothing but sellers when the first couple of big hedge funds pull the rip-chord on their positions. You want to be positioned ahead of this dynamic. Any investment manager who does not take a serious look at reducing exposure to this sector – in the face of all the evidence I have been presenting – is breaching its fiduciary duty to its investors.


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