A decline in housing remains one of my strongest investment ideas. Let’s walk through the thought process…
Congress is subsidizing housing demand via its first-time homebuyer tax credit. This pulls forward future demand. When the program ends, demand starts to dwindle (and will fall to an even lower amount than what normally would have occured). If Congress extends this subsidy, which happened last fall, even more demand will be pulled forward, and the fall will be even greater. This ongoing game of taxing people to subsidize home ownership has consequences as demand cannot be artificially inflated forever. Housing demand will decline.
A simple rule of economics: when demand declines, prices fall.
The second part of the equation is the onslaught of delinquencies and foreclosures coming onto the market. Reasonably thinking, with an enormous amount of houses soon to be available for sale, constructing even more houses is not a good business to be in.
Another simple rule of economics: when supply increases, prices fall.
The trade: bought 2 ITB July put options at strike $17.50, for $4.50 each. The breakeven is about $13, and the stock closed at $13.25 today. (I made a very similar trade last month).
