Dangerous Illusions Of Prosperity

Investment Research Dynamics

Two days ago the temperature in Denver hit 80 degrees.  It felt like the middle of summer. This morning looked like this:

About 6 weeks ago the The Denver Post ran article that was promoting the idea that the rental market in Denver is hot.  Funny that – every single big apartment building is offering one month free as a move-in incentive.  I re-signed my lease recently – in a building that is one year old – and received month free and no rent increase plus I negotiated a one-month move-out notice (typically the rental rate on a month-to-month lease is about 10-15% higher).  The rental market in Denver reeks of desperation.   And this is with at least a dozen new buildings at various stages of work in process just in central Denver.

Last weekend the Denver Post ran an article promoting the idea of that the housing market is “red hot.”  Too be sure, some homes are sold quickly and there are some reports of bidding wars.  However, this is in the under $600k range where, according to RealtyTrac, 35% of the country is still underwater on their mortgage (based on “effective negative equity” which incorporates the cost of selling and moving).

But on the flip-side of that article, when you drive through the higher end areas of Denver – which I do everyday – you see this:

These are two separate areas. Adjacent to the homes on the right, the developer is finishing up an 18-unit townhome complex (6 three-home pods) that were originally slated for resale but are now being offered for rent. Two of the units are privately listed, which means investors blind-sided by illusions of prosperity bought the units at some point early in the construction process.

This is what happens when a bubble has formed and is getting ready to burst.  A massive amount of malinvestment and misuse of capital.  The Fed has squeezed all concept of risk out of the markets and has forced investors to assume an absurdly enormous amount of risk based on the illusion of prosperity.  So far not one of those townhomes has been leased out yet and this is with a rental market that is giving one-month free rent to move into a brand new upscale apartment building.

I am not wrong on my call about the housing market.   The homebuilder stocks have boomeranged higher with the entire stock market.   One bank CEO called this “the mother of all bubbles.”   At some point soon, reality is going to grip the stock market and it will be ugly.

This particular homebuilder (click on pic below) is on the edge of insolvency, it has a triple-C rating from the bond rating agencies, it has more debt per home in its inventory now than in 2005 at the bubble peak and it competes in the low-end segment of the market, where real monthly household income is declining.  This stock gave opportunistic traders a 25% gain from shorting it when I published my report the first time around.  The stock price has bubbled back up to where it was back then (just 5 months ago).   This time around it will give investors a much bigger bang for the money:

In fact, all of the homebuilders I have covered so far are ripe for shorting – or adding to your shorts if you’ve been squeezed higher:  Homebuilder Reports

You will make a small fortune shorting this sector if you do it carefully and with patience.  My reports explain why and how.