Just for the record, I would not be surprised if tomorrow’s new home sales report is stronger than expected. The numbers are coming from the Government’s Census Bureau and the new home sales series has been irregularly volatile and unreliable. But based on every homebuilder earnings report released so far, new home sales are dropping quickly. Mortgage purchase applications confirm this, as 93% of all new homes use a mortgage for the purchase. Any bounce in homebuilders on tomorrow’s report should be shorted with both hands.
Sales are going lower from here. We are in a long term secular bear market and the market – aided by several trillion in Fed and Govt stimulus, achieved a small dead cat bounce in the context of the bigger trend going on. Employment as a percent of the working age population is at historical lows and those who are employed are back to the 1994 average earnings levels. There is no organic economic support for the housing market.
I thoroughly review the National Association of Realtors’ August existing home sales report in this article: August Existing Home Sales Unexpectedly Drop.
As you’ll see, an analysis of the data not promoted in yesterday’s headline reports shows the market is really starting to deteriorate. And this is with a backdrop of mortgage rates that are the lowest in a year and not far from all-time lows.
The homebuilder stocks are a phenomenal shorting opportunity. By the time this over, at least half of them will be bankrupt because of all of the debt they’ve taken in the last 24 months and the ones that survive will be trading well under $10. I have three homebuilder short-sell ideas, one of which will probably be one of the bankruptcy casualties: Homebuilder Short-Sell Reports.