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The housing market continues to see an influx of new buyers.
Bidding wars, low inventory, and skyrocketing prices – potential buyers continue to flow into the home buying world at an unbelievable rate. And many buyers have their eyes on new construction, aiming for newly built model homes across the nation.
This has left builders feeling more optimistic about their business than they have in the past 20 years. And builder confidence in the newly built, single-family home market jumped six points to 78 in August on the National Association of Home Builders/Wells Fargo Housing Market Index.
This puts the index at the highest level in its 35-year history. And this is all thanks to the surge in consumer demand in less urban areas. This demand, paired with low interest rates, has pushed buyer traffic to all-time highs.
But despite these impressive numbers, there's trouble on the horizon, which could derail the current market momentum that builders have been celebrating.
The possible trouble maker? The rising cost of lumber.
The cost of lumber has been skyrocketing, and there are a few reasons why. The first and most obvious reason would be demand. As I mentioned earlier, buyers are flooding into the market, looking for more space and eyeing model homes. These new homes require material to be built, hence where the increasing demand for lumber is coming from.
Secondly, mills across the nation shut down in April and May, and they most certainly did not expect to see the level of demand they're currently seeing. So, the stock is running behind. On top of this, there have been issues with transportation and labor because of the pandemic – meaning that they're not only having a hard time keeping up production-wise, but also actually delivering it to the consumer.
And a shortage in lumber means a shortage in production, leading to an even bigger shortage of houses on the market for this overly eager buying market.
This shortage, however, isn't necessarily a bad thing for home builders. In fact, many believe it will give the industry an even more significant boost than it's already seen.
But here's why I'm not buying into that hype and instead looking at playing another much more profitable home sector…
Home Renovation: Where's the Money?
I'm sure it comes as no surprise when I say this, but we're seeing a massive shift in spending as consumers move away from restaurants, bars, and entertainment and focus on where they're currently spending most of their time – at home.
From redecorating to renovating to buying a new home altogether, we've seen an influx of cash flow into this industry over the last few months. But if I'm honest, I don't think that this demand is here to stay.
And that's why I won't be looking to buy any homebuilders such as KB Home (NYSE: KBH) and Lennar Corp. (NYSE: LEN). Because I believe this could be a short-term top in these names – especially if we get a vaccine soon.
But no worries, because I have my eye on another opportunity in the home sector. You see, we're seeing a decline in homes being put on the market. There could be several reasons for that, but analysts believe that many consumers just aren't interested in joining the competitive market. So instead of trying to purchase a new home, they're looking to renovate the homes they already own.
That's why I have my eye on "home supply" stores – specifically Home Depot Inc. (NYSE: HD) for a short-term play on this booming market. Now, HD announced strong earnings on Tuesday, Aug. 18, reporting that its profits surged 25% to $4.33 billion, or $4.02 per share, during the fiscal second quarter. So, I'm giving you the green light to look into call options on this stock for a quick cash-in on this booming market.
Before You Go…
Even though many industries are still feeling lingering effects of lockdowns and forced closings, there are still reasons to feel optimistic about several opportunities.
Regardless of what the rest of the year brings, my Project 303 readers and I will continue to use the recommendations of my S.C.A.N. trading system…
Even in 2020's volatile markets, it's still been able to deliver plenty of double- and triple-digit winners.
And like I mentioned above, there are plenty more in our crosshairs.
Click here now to get on board before we take our next profits.
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About the Author
Andrew Keene, editor of the 1450 Club, Super Options, and Project 303 at Money Map Press, is a globally known trader and a renowned expert on all things options.