It is not often that you hear an investment insight ahead of the curve, before the market catches on. When it happens, it is easy to justify waiting for confirmation before acting. But, of course, by the time there is enough information to confirm the insight, the market has caught up and much of the opportunity is already priced in. To take advantage of such an insight, you have to have enough confidence to act before the rest of the world catches up. If you want to know what that feels like, I recommend reading Profit from the Coming Housing Shortage, by Tim Siegel, one of our Marketocracy Masters.
According to Tim, an impending housing shortage has created an investment opportunity that is to date largely unrecognized by Wall Street analysts, and time still remains for individual investors to act before everyone else realizes what is occurring.
In other words, there is a window of opportunity, and there is still time to act.
Why doesn’t everyone already see this coming?
When I listen to Wall Street analysts discuss the housing market, it feels as though they are all working off the same spreadsheet. Without exception, Wall Street analysts seem to use changes in the employment numbers as a leading indicator for housing demand.
Most recently, the consensus on Wall Street has been that although unemployment has gone down, it has occurred due to a shrinking workforce as people who are unable to find employment simply give up and stop looking. Because a smaller workforce implies that there are fewer employed people who can afford to purchase a house, many analysts are forecasting lackluster demand for housing.
What’s wrong with this logic?
After reading Profit from the Coming Housing Shortage, I believe one of Tim’s best insights on this topic is an explanation of how today’s employment numbers are understating the growth in housing demand.
While it is true that a person who drops out of the workforce because they have ceased to look for a job is unlikely to be a homebuyer candidate, there is another reason that people drop out of the workforce – retirement.
Tim points out that most retirees can still afford housing and should therefore still be considered part of the housing market.
To drive this point home, Tim estimates the number of people who have left the workforce due to retirement but still should be considered part of the housing market. Examining social security data, Tim looked at the period of time between the end of 2007 and November 2013. In this time, the number of people drawing on social security increased by 6.3 million.
This implies that those analysts using employment numbers to forecast housing demand may be overlooking and therefore not taking into account approximately 1 million people a year with home buying power.
To me, this seems to be a pretty significant oversight when you consider that in 2013, the housing industry completed a little less than 1 million new homes. Furthermore, as the Baby Boomers have just begun to retire, the number of retirees leaving the workforce is likely to rise throughout the next decade.
Tim’s Track Record
At Marketocracy, we have been tracking Tim Siegel since September 30, 2004. Over the past 9+ years, his portfolio has grown 15.6% a year vs 7.9% for the S&P 500.
Tim is a value investor with an excellent sense of timing. His early returns were attributable to an insight about how global economic growth would reveal capacity constraints in the supply chain for energy. After that, he transitioned into gold mining stocks upon realizing that gold mines that had been considered uneconomic when gold was selling for $800 could be reopened profitably with gold prices above $1,200.
It is the nature of value investing that you do not always see the next opportunity clearly when it is time to exit the last opportunity. When Tim has been right, his insights have yielded two to three years of excellent returns. He was able to make the transition from energy stocks to materials stocks fairly smoothly, but the transition out of materials stocks was a little tougher. To his credit, Tim’s portfolio managed to make 9.2% last year even as the price of gold fell over 28% and many gold miners lost 30% to 50% of their value.
The next chapter of Tim’s investment track record depends upon whether or not he is right about the housing market.
If you agree with Tim, what should you buy?
In his book, Tim reviews a number of Real Estate Investment Trusts (REIT) and homebuilding stocks that will benefit if there truly is a housing shortage. Among his ideas, one that stands out to me is American Residential Properties, Inc. (ARPI). Although there are many firms that buy existing homes and rent them out, Tim attests that ARPI is the only one that is public.
Significant to note is how uneven the housing market is across the United States. Should there be a housing shortage, it first will be felt in areas of the country where there is growth. Consequently, Tim favors REITs and homebuilders that operate in areas of the country where land is scarce and the early stages of a turnaround are evident. Among REITs, Tim identifies strong choices to be Equity Residential (EQR) and Avalon Bay Communities (AVB). Among homebuilders, Tim singles out DR Horton (DHI) in his report, and Pulte Homes (PHM) is the single largest position in his portfolio right now.
Clients in our SMA program at Marketocracy own these stocks because they have allocated a portion of their account to Tim Siegel’s model portfolio. For more information about Tim Siegel, to view his top 5 holdings, and to learn more about his strategy, visit our website.
Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
