Successful Builder Loses Big – Shorting Other Builders
I had an acquaintance who was a very successful regional homebuilder in the 1990s and early 2000s.
By early 2005, he was so certain we were in a housing bubble that he started to short the major homebuilders (Lennar, Toll Brothers, Pulte, etc.).
By “shorting,” he was betting that stocks would fall.
He understood the market better than anyone and was 100% correct to predict the fall of these mighty stocks – but he still lost hundreds of thousands of dollars.
He lost so much, despite being right, because he could not predict the timing of the fall.
Pulte stock, for example, peaked in 2005 in the low $40s, but did not bottom out until 2011 at under $5.
My friend still ended up making a ton of money though because he continued to short stocks until his bets went the right way.
The above story illustrates a few things:
- Many insiders saw the “crash” coming. There were thousands of housing and mortgage industry insiders who saw the 2008 meltdown coming because we saw (1) the rampant speculation in housing by huge numbers of unqualified borrowers; (2) the insane bidding frenzies for land by builders and over-leveraged speculators; (3) the ridiculous lending guidelines that allowed people to buy houses with no money down and no income verifications; and (4) the massive buildup of housing inventory.This is a sidebar (and a topic I have hit often over the years) and somewhat unrelated to this blog, but it does relate to another question I often get: “Do you think housing prices will correct?” And my answer is: “maybe a bit on the high end, but probably not for the middle and low ends because inventory is far tighter because builders have not been building at the same pace, lending guidelines have been far more rational over the last ten years, and homebuying demographics are much stronger than they were in 2008.” (Note: I could be wrong too 😊)
- Experts wrong. No less of “an expert” than our illustrious Fed Chairman, Ben Bernanke, told us in 2005 that there was no housing bubble. This is comical because he had hundreds of PhD economist feeding him data and because he could not have been more wrong – despite all that “expertise.”
- Nobody can predict “when.” This is the most important takeaway for purposes of this blog. No matter how smart insiders might be, they still cannot predict timing when it comes to major economic events.
When Will Rates Fall?
I often get the above question too, whenever I mention that there is a strong likelihood that rates will fall again for the reasons mentioned in this blog from last week: How Much Have Rates Risen? Will They Fall? (please revisit the blog for some of the reasons why rates could fall)
In the most recent episode of the Macro Voices podcast, guest Alex Gurevich makes another very strong case for rates falling. He states that inflation will wane for a variety of reasons and that the Fed will likely reverse course. He further states that the markets are corroborating his views, as indicated by gold prices, crypto prices and bond yields – as all would be much higher if continued high inflation numbers were on the horizon.
Note: This does not mean that rates will fall with certainty. For example, the Macro Voices host (Erik Townsend) thinks we are at the start of a major “secular inflation” spiral, like we saw in the 1970s, that could drive rates much higher no matter what the Fed says or does. And – I could easily write an entire blog setting out additional reasons why rates could continue to rise.
But – with all that said, I still think there is a strong likelihood that rates will fall again – even though I and everyone else just have no idea when.
Many market watchers are nonetheless predicting that rates will fall in 2023 – and we will see if they are right.
All I do know though is that if the Fed makes a prediction, we should all expect the opposite. 😊
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