Fueled by hot inflation numbers as well as low mortgage rates and supply chain constraints in the construction market that are slowing down the construction of new homes, the cost of real estate has skyrocketed over the past couple of years. In the U.S., home costs increased 11% in 2020, marking a record that will almost certainly be smashed in 2021, which is on track to record a 17% increase in the cost of housing.
Of course, this is across the entire country; certain areas are experiencing much higher appreciation, such as Texas, which had seen real estate prices increase 24% year over year as of the second quarter of 2021. Price increases have been the highest in big cities, which is where the majority of the job growth is.
Are we in a housing bubble?
With housing prices increasing so quickly, some may be waiting with bated breath for the bubble to pop and prices to come crashing down again, just like they did during the financial crisis in 2008.
However, there are some reasons to believe the housing market may not be in a bubble after all. For example, wages are increasing as the labor shortage is forcing many employers to pay better wages. The shortage of housing also means more people are moving in with family or moving further out into the country, where housing is cheaper.
The theory that real estate prices aren’t in a bubble has received a strong backing from insiders recently. According to GuruFocus’ Insider Trends, which tracks the ratio of insider buying and selling among S&P 500 stocks as well as the individual sectors among S&P 500 stocks (such as real estate, energy, etc.), there was a strong spike in real estate insider buying last month.
The overall insider buy-sell ratio for the real estate stocks in the S&P 500 was 1.96 last month, which is the highest read since March 2020 and the second-highest read since 2015.
The ratio of CEO buys to sells for the sector was even higher at 5.00. This marks the third-highest read of the past decade.
Finally, the buy-sell ratio for chief financial officers in the real estate sector was 3.00. The last time the CFO buy-sell ratio surpassed this number was in 2008, during the worst of the financial crisis:
A vote of confidence
When insiders are buying their company’s stock, investors tend to pay attention since this could mean that the people who know the company the best are expecting the stock to post strong gains in the future. While insiders don’t always end up making timely calls, their vote of confidence is encouraging to investors.
What is unusual about this spike of buying is that it comes when the S&P 500 is notching record highs. In the past, insiders have typically jumped on buying opportunities after a selloff, not when prices are higher than ever. The iShares U.S. Real Estate ETF (IYR, Financial), which tracks the index’s real estate stocks, is up 31.47% year to date, outperforming the broader S&P 500’s 27.14% gain over the same timeframe.
Now is certainly not the time to buy real estate stocks at bargain prices, but insiders seem to be betting on just that. Only time will tell if they are correct in predicting that U.S. real estate prices will continue to soar. Factors such as the highest inflation numbers in 30 years and supply constraints among homebuilders suggest they might turn out to be right.
