Is Senior Housing the Next “Big Short”?

Summertime is shorts weather, but we’re not talking about the “Bermuda” type. In the spirit of summer reading, I just finished “The Big Short” by Michael Lewis, author of the books “Liar’s Poker” and “The Blind Side.”

For those who have not read “The Big Short”, it examines different business people taking short positions against the subprime mortgage market, increasing home values and the other financial products and companies that were components of the housing market prior to the financial criss. After completing the book, it became apparent that some of the characteristics of the senior housing market resemble those of the broader housing bubble during the last 10 years.

When looking at the characteristics of the aging population, do the facts make the senior housing trade look too good to be true?

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Even with the demographics and the socio-economic profile of the senior and baby boomer population, is investing in senior living a wise choice by default? While there are some some uncertainties that remain, will we start to see more of the “build it and they will come?” scenario? Or how about looser margin and ratio requirements on underwriting standards just because the need is inevitable? What about a pro-forma budget from an inexperienced developer/operator/investor…sounds like a stated income or NINJA loan to me.

While the hope is that we’ve learned our lesson, let’s take a quick look at the long trade of senior housing:

  • Single Family Housing. The logical long position would be the purchase of home builder stocks that have a heavy concentration of 55+ housing projects. However, this is not a pure trade. Another long position could be the stocks of home improvement stores such as Home Depot or Lowes to play the home-renovation trade for aging in place.
  • Independent & Assisted Living. Besides individual operators of independent and assisted living, there are a number of service providers and entities that serve theses companies that are publicly traded.
  • Hospitals and Skilled Nursing Facilities. Probably the most sensitive sub-class subject to possible seismic changes that are dependent upon changes to Social Security, Medicare and Medicaid.
  • REITs. They’re inherently long positions given the cheap, long-term financing that these entities have secured in the public markets. This, coupled with (hopefully) bottomed valuations of the assets given the broad downturn in the real estate markets.

With all these long positions, who takes the other—short—end on the trades? Someone who thinks that seniors will ultimately stay where they are or simply cannot or refuse to sell their homes at discounted prices? How about those D-I-Yers who will take care of Mom and Dad in their Granny Pods or Granny Flats or additions to their current homes? Does shorting senior housing sound as crazy as shorting the housing market and the subprime mortgage market did back in 2005 and 2006 when housing seemed it could do nothing but go up?

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There are always two sides of every trade. For those who are long senior housing and living, the bet with the demographics over the next 25 years looks like easy money….almost as easy as a 10% annual return each year from 2000-2007 on your house.