Category Archives: Housing Market

The U.S. (and Global) Economy Is In Trouble

Jerome Powell will deliver the Fed’s semi-annual testimony on monetary policy (formerly known as the Humphrey-Hawkins testimony)  to Congress this week.  He’ll likely bore us to tears bloviating about “low inflation” and a “tight labor market” and a “healthy economy with some downside risks.”  Of course everyone watching will strain their ears to hear some indication of when the Fed will cut rates and by how much.

But the Fed is backed into a corner.  First, if it were to start cutting rates, it would contradict the message about a “healthy economy.”  Hard to believe someone in control of policy would lie to the public, right?  Furthermore, the Fed is well aware that it has created a dangerous financial asset bubble and that price inflation is running several multiples higher than the number reported by the Government using its heavily massaged CPI index.

Finally, the Fed needs to keep support beneath the dollar because, once the debt ceiling is lifted again, the Treasury will be highly dependent on foreign capital to fund the enormous new Treasury bond issuance that will accompany the raising, or possible removal, of the debt ceiling.  If the Fed starts slashing rates toward zero, the dollar will begin to head south and foreigners will be loathe buy dollar-based assets.

However, if the Fed does cut rates at the July FOMC meeting, it’s because Powell and his cohorts are well aware of the deteriorating economic conditions which are driving the data embedded in these charts which show that US corporate “sentiment” toward the economy and business conditions is in a free-fall:

The chart on the left is Morgan Stanley’s Business Conditions index. The index is designed to capture turning points in the economy. It fell to 13 in June from 45 in May. It was the largest one-month decline in the history of the index. It’s also the lowest reading on the index since December 2008.

The chart on the right  shows business/manufacturing executives’ business expectations (blue line) vs consumer expectations. Businesses have become quite negative in their outlook for economic conditions. You’ll note the spread between business and consumer expectations (business minus consumer) is the widest and most negative since the tech stock bubble popped in 2000.

Regardless of the nonsense you might read in the mainstream media or hear on the bubblevision cable channels, the U.S. and global economies are spiraling into a deep recession.  Aside from the progression of the business cycle, which has been hindered from its natural completion since 2008 by money printing and ZIRP from Central Banks, the world is awash in too much debt,  especially at the household level. The Central Banks can stimulate consumption if they want to subsidize negative interest rates for credit card companies.  But short of that, the economy is in big trouble.

I publish the Short Seller’s Journal, which features economic analysis similar to the commentary above plus short selling opportunities to take advantage of stocks that are mis-priced based on fundamentals.  You can learn more about this weekly newsletter here: Short Seller’s Journal information.

The Flight To Safety In Gold – A Conversation With The Prepared Mind – Part 1

The Chinese have been slowly trading out of their U.S. dollar exposure and converting it to gold. Something a lot of analysts don’t pay attention to because they don’t even know what the facts are [with regard to the actual amount of physical gold held by China] when they look at China and proclaim that China has a debt problem.  Sure, China has a fiat currency-derived debt problem but it’s nowhere near as bad as the U.S. fiat currency-derived debt problem. And guess what? On the other side of the paper debt China has 25,000-35,000 tonnes of physical gold they’ve hoarded over decades.

The Prepared Mind invited to its podcast to discuss a wide range of issues from precious metals to geopolitical problems. Here’s Part 1:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

New Home Sales Tank – KBH Claims Its Numbers “Improved”

“We are confident we can produce further improvement in our results in the second half of this year” – KB Homes CEO in reference to its “returns-focused” growth model

“Returns-Focused Growth Model.” Has a nice ring to it, doesn’t it? KBH’s revenues dropped 7.3% YoY for Q2. It’s operating income plunged a healthy 28%. How’s that growth strategy working out for you, Jay?

Of course it produced a headline EPS “beat.” But this is because it implemented a full-blown deep-tissue body massage to GAAP accounting, including capitalizing costs that should have been expensed (interest expense and homebuilding expenses), it recognized a non-cash “income” in off-balance sheet JV’s (a suspiciously round $2.5 million) and slashed its arbitrarily determined book tax rate to 17% from 28%.

Except in certain areas where markets remain hot due to migration patterns (hundreds moving to Denver weekly – please stop), the housing market is contracting despite the lowest mortgage rates since late 2017. The Government has all but made it possible for a barely breathing corpse to take down a tax-payer guaranteed mortgage (there’s even several no-down-payment programs).

The homebuilder sentiment index (formally called the “Housing Market Index”) was released on Monday morning. It fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales  environment now or in six months, declining foot traffic translates into falling sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense from lower mortgage rates somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

A long-time subscriber contacted me and was curious about the divergence between my view of the housing market and Josh Steiner’s at Hedge Eye. Here’s my response: “I tried to follow Hedge Eye several years ago. It didn’t take me long to discard them into the rosecolored glasses/perma-bull bucket. Hope and optimism is easier to sell than doom, gloom and reality.  Housing market perma-bulls don’t understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 626,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably thinks is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales. The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% since November.

Mortgage purchase applications dropped 1% this past week after a reported 4% decline the week before. Mortgage purchase applications have declined 8 of the last 10 weeks. This is despite the stunning drop in the 10yr Treasury yield and the related decline in mortgage rates. Furthermore, June is seasonally a peak month for home sales and thus mortgage purchase applications should be soaring.

KBH’s unit sales were flat but the average selling price plunged 8.5%. The Company had to resort to heavy discounting to move homes while it’s inventory continues to soar. The DJUSHB has been rising despite the fact that falling interest rates are not stimulating housing market activity. I’m certain that hedge fund algos have been programmed to buy homebuilders when the 10yr yield falls.However, at some point the fundamentals will take over and hedge fund algos will be reprogrammed to start selling.

The DJUSHB knifed through it’s 50 dma earlier this week. Despite the overall strength in the index this spring, I recommended two shorts in my Short Seller’s Journal that have been home runs. In mid-April, I recommended shorting Realogy (RLGY) at $12. It’s trading at $7 as I write this. I also recommended shorting HOV at $15. It’s trading at $6.94 today. Realogy is the best bellweather stock indicator for the housing sector because its the largest realtor services company. HOV is just a zombie company with far too much debt and will hit the wall eventually. That’s why indsiders dump their shares continuously.

There’s a lot downside profit opportunities in the housing sector. I review many of them in my Short Seller’s Journal. This includes ideas for using options and trading strategies. To learn more about this follow this link:  Short Seller’s Journal information.

ZIRP And QE Won’t Save The Economy – Buy Gold

It’s not that we’ll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all…  – “Chernobyl” episode 1 opening monologue

I’ve been discussing the significance of the inverted yield curve in the last few of my Short Seller’s Journal. Notwithstanding pleas from the financial media and Wall Street soothsayers to ignore the inversion this time, this chart below illustrates  my view that cutting interest rates may not do much  (apologies to the source – I do not remember where I found the unedited chart):

The chart shows the spread between the 2yr and 10yr Treasury vs the Fed Funds Rate Target, which is the thin green line, going back to the late 1980’s. I’ve highlighted the periods in which the curve was inverted with the red boxes. Furthermore, I’ve highlighted the spread differential between the 2yr/10yr “index” and the Fed Funds target rate with the yellow shading. I also added the descriptors showing that the yield curve inversion is correlated with the collapse of financial asset bubbles. The bubbles have become systemically endemic since the Greenspan Fed era.

As you can see, during previous crisis/pre-crisis periods, the Fed Funds target rate was substantially higher than the 2yr/10yr index.  Back then the Fed had plenty of room to reduce the Fed Funds rate. In 1989 the Fed Funds Rate (FFR) was nearly 10%; in 2000 the FFR was 6.5%; in 2007 the Fed Funds rate was 5.25%. But currently, the FFR is 2.5%.

See the problem? The Fed has very little room to take rates lower relative to previous financial crises. Moreover, each successive serial financial bubble since the junk bond/S&L debacle in 1990 has gotten more severe. I don’t know how much longer the Fed and, for that matter, Central Banks globally can hold off the next asset collapse. But when this bubble pops it will be devastating. You will want to own physical gold and silver plus have a portfolio of shorts and/or puts.

The Fed is walking barefoot on a razor’s edge with its monetary policy. Ultimately it will require more money printing – with around $3.5 trillion of the money printing during the first three rounds of “QE” left in the financial system after the Fed stops reducing its balance sheet in October – to defer an ultimate systemic collapse.

But once the move to ZIRP and more QE commences,  the dollar will be flushed down the toilet. This is highly problematic given the enormous amount of Treasuries that will be issued once the debt ceiling is lifted (oh yeah, most have forgotten about the debt ceiling limit).  If the Government’s foreign financiers sense the rapid decline in the dollar, they will be loathe to buy more Treasuries.

The yellow dog smells a big problem:

It’s been several years since I’ve seen gold behave like it has since the FOMC circus subsided. To be sure, part of the move has been fueled by hedge fund algos chasing price momentum in the paper market. But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.

While the financial media and Wall Street “experts” are pleading with market participants to ignore the warning signals transmitted by the various yield curve inversions (Treasury curve, Eurodollar curve, GOFO curve) gold’s movement since mid-August reflects underlying systemic problems bubbling to the surface. The rocket launch this week is a bright warning flare shooting up in the night sky.

…What can we do then? What else is left but to abandon even the hope of truth, and content ourselves instead…with stories. (Ibid)

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

The Fed Is Running Out Of Bullets

“The latest University of Michigan consumer confidence report noted that its index tracking those who think it’s a good time to buy a home has fallen by a hefty eight points in the past two months even as mortgage rates have dropped.” – Danielle DiMartino Booth, “The Fed Can’t Help Housing Or Autos At This Point

I’m not the only analyst who has concluded that lower rates likely will not re-stimulate housing market activity. As I’ve argued in my Short Seller’s Journal, the “pool” of potential homebuyers who can qualify for a mortgage has greatly diminished. In fact, mortgage delinquencies are rising because many who stretched to buy a home in the past several years are struggling with the all-in cost of home ownership. Stagnant wages and the rising cost of necessities are largely the culprits.

“Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.” – NAHB Chief Economist Robert Dietz. That quote accompanied the NAHB’s release of its Housing Market Index, which used to be called the Homebuilder Sentiment Index because it’s a “how do you feel?” survey.

The Housing Market index fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales environment now or in six months, declining foot traffic translates into decline sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first-time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

Quant-oriented perma-bulls, like Josh Steiner at Hedge Eye, understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 673,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably imagines is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales.

The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% in 7 months.  Just look at the big gap down in mortgage purchase applications reported this week despite a 10yr yield that has fallen relentlessly.

It doesn’t really matter what the Fed does today with the Fed Funds rate policy decision. To be sure, if the FOMC postures toward take rates to zero if necessary it might juice the stock market temporarily.  But it won’t take long for brains to take over from the algos and interpret the message that would be transmitted by the FOMC  as extraordinarily bearish.

Any attempt at holding off the economic catastrophe creeping into view would require massive money printing.  But given that some FOMC members consider a $3 trillion balance sheet to be “normalized,” I’m not sure at the margin to what degree more money printing  will save the economy.  Perhaps a Debt Jubilee for all households…

The above commentary includes excerpts from my Short Seller’s Journal, a weekly newsletter  ideas for those looking to short stocks – including options strategies – based on fundamental analysis. You can learn more or subscribe using this link:  Short Seller’s Journal information.

Something May Have Blown Up Already In The Financial System

The price of gold ran higher eight days in a row before today’s interventionist price smack. Technically, whatever that means, the gold price was likely due for a healthy pullback anyway. The price of gold is responding to what appears to be the Fed’s decision to begin cutting interest rates, though maybe not at the June meeting. Also, the Fed’s Jame Bullard commented that a $3 trillion Fed balance sheet should be considered the “new normal.” This means that close to 75% of the QE program was outright money printing.  Hello Weimar-style printing, so long U.S. dollar…

In 2007 the Eurollar futures curve was steeply inverted by late summer 2007. Back then Ben Bernanke assured the world that “subprime debt was contained.” In truth, it was already blowing up. Currently, the Eurodollar futures curve inversion is steeper now than it was in 2007 (graphic from Alhambra Investments, with my edits).

Silver Doctor’s James Anderson invited me to be his debut guest from his new perch in Panama. He had just set up his office rig and the internet connection was a bit choppy.  But we chatted about why the various inverted yield curves and the recent rise in the price of gold may be telling us that the brown stuff could already be connecting with the fan blades in the financial system. Here’s the link: Something Has Blow Up In The Financial System or click on the video below:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Sorry Permabulls, It’s Not Different This Time – Got Gold?

An inverted yield curve has historically been the most accurate indicator of an impending or concurrent recession. The inversion during late 2006 and most of 2007 is a good example. Studies have shown that curve inversions precede a recession anywhere from 6 months to 2 years. I would argue that, stripping away the affects of inflation and data manipulation, real economic activity has been somewhat recessionary for several years.

The shelf-life of financial topics is about as long as the lifespan of a mayfly (about 24  hours). Several months ago, a debate raged about the significance of the inverted yield curve (short term rates are higher than longer term rates). Most perma-bull pundits who populate mass financial media advised their minions to ignore the yield inversion because “it’s different this time.”

The inverted yield curve discussion disappeared soon after the stock market responded to the stock market intervention after the Christmas massacre. However, over the past  several days, the yield curve has “collapsed” in the sense that yields at the long end (10-years and beyond) have fallen more sharply than at the front end of curve, resulting in a yield curve inversion that is now at its steepest since 2007 (measured using the 3-month T-bill rate vs the 10-year Treasury yield).

The chart to the right was prepared by Phoenix Capital (with my edits). It shows the SPX from 1999 to present on a weekly basis vs the the yield curve (3-month T-bill minus the yield on the 10-yr Treasury bond). When the blue line in the bottom panel goes below the black line (the black line is my edit to clarify when the spread between the 3mo Bill and 10yr Treasury has gone negative), the yield on the 3-mo Bill is higher than the yield on the 10yr Treasury.

The chart must have been prepared prior to the holiday weekend because the 3-mo/10yr has been inverted since Monday. But more to the point, you’ll note that this particular “flavor” of inversion was accompanied by a sharp drop in the stock market from 2000-2003 and from 2007-2009. The yields have been inverted between other segments of the curve (1yr to 5yr, for instance) nearly continuously since last summer.  The curve is even more inverted now than when I wrote this commentary for my Short Seller’s Journal subscribers last week.  The 5yr Treasury is well below 2%.  The 3mo/5yr inversion is close to half a percentage point (46 basis points).

In addition, the upper bound of the Fed Funds rate “target” (2.25-2.50%) is now above the entire yield curve out to 10 years. The bond market is signaling to the Fed that the economy sucks and the Fed Funds rate needs to be reduced down to at least 2%. The term “bond market vigilantes” was coined originally by Ed Yardeni in the early 1980’s to convey the idea the bond market could be used to “guide” the Fed’s monetary policy implementation. The “bond vigilantes” right now are “screaming” at the Fed to reduce the Fed Funds rate and to ease monetary policy.

While the market can’t dictate the Fed Funds rate, big bond funds with a total rate of return mission will pile into the Treasury bonds at the longer end of the curve, driving down yields (bond prices rise) in the expectation that the Fed will have to cut rates sooner or later. This is the market dynamic that induces an inverted curve.

Whether or not the Fed will “listen” to the bond market and cut the Fed Funds rate at the midJune FOMC meeting remains to be seen. To be sure, the researchers at the Fed who advise on policy know that the real rate of inflation is significantly higher than CPI-measured inflation. They also know the economy is reeling. But the Fed has to balance easier monetary policy with setting policy that supports the U.S. dollar.

Maintaining a stable dollar is critical to inducing foreign money to buy Treasuries, the supply of which will soar once the debt ceiling is lifted. If the Fed cuts rates too soon or too quickly, especially relative to the ECB or PBoC, the dollar could experience a not insignificant sell-off. This in turn would cause further damage to the economy.

The above commentary is an excerpt from my latest Short Seller’s Journal. Each week I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

But We Were Told “It’s Different This Time”

“U.S. Officials Meet in Secret Over Junk-Loan Frenzy as Recession Alarms Flash”

U.S. Treasury Secretary Steven Mnuchin on Thursday led a secret meeting of top U.S. financial regulators on the risks to global markets from the recent surge in corporate borrowing…”No details were provided on the gist of the discussion, though according to the statement the panel heard an ‘update from Craig Phillips, a counselor to Mnuchin, on recent market developments involving corporate credit and leveraged lending'”. – Article link

Something(s) is(are) starting to melt-down “behind the scenes” in the global financial system.  The meeting referenced above is the “tell.”  Craig Phillips, “counselor to Mnuchin,” was formerly a managing director and member of the Global Operating Committee of BlackRock.   It’s quite likely that Phillips’ former colleagues have put Phillips on high alert about problems developing in the credit markets, both domestically and globally.

Even more interesting is that fact that Fed Chairman, Jerome Powell, gave a speech recently in which he denied that credits risks are mounting in the system:  “Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.”

Powell’s assertion eerily echoes a similar comment made by then-Fed Head, Helicopter Ben Bernanke in mid-2007 about subprime mortgage risk being “contained.”  But Powells’ statement followed by a meeting convened by Treasury Secretary Mnuchin under the advisement of a former BlackRock hatchet-man is the silent scream of insiders who see the probability of another financial system tsunami forming…

Of course, the yield curve has been sending these warnings for about a year.  But they keep telling us it’s different this time…

The Economy Continues To Deteriorate

Trump’s trade advisor, Peter Navarro, was on CNBC today asserting that the economy was expanding at an unprecedented rate.  Either Navarro is tragically ignorant or an egregious liar. Either way he looks like an idiot to those us who study the real numbers and understand the truth.

The Global Manufacturing PMI (Purchasing Managers Index) dropped to 50.4 – the lowest since July 2016. It’s been falling almost nonstop since mid-2017. The current period of decline is the longest in the 20-year history of the index. The index includes the purchase of inputs for the manufacturing of consumer goods, investment goods (capex material) and intermediate goods (semi-finished goods used as inputs for final goods).

The pace of decline for auto sales in China, Europe and the U.S. is the fastest in at least three decades excluding the great financial crisis time period. Visible evidence of the contracting global/domestic economy is Ford’s announcement that it’s cutting 10% of salaried (white collar) workforce, about 7,000 jobs, by the end of August.

The trade war is not the cause of U.S. economic weakness. If anything, it’s nothing more than an effort by the Trump Government to manufacture a scapegoat for the inevitably severe economic recession engulfing  the system. China’s exports to the U.S. were 5% of its GDP in 1995. By 2005 exports to the U.S. had risen to 9% of China’s GDP. Currently exports to the U.S. represent just 3% of China’s GDP.  These numbers show that the trade war between the U.S. and China is not the cause of global economic weakness.

Rather, the cause is the massive misapplication of capital from 10 years of over $21 trillion in money printing and debt issuance. This artificially over-stimulated economic activity. Now that the stimulus has worn off, the major economies – especially the U.S. and China – face the problem of servicing their debt load and the consequences of a decade of misallocated capital.

Bond guru, Jeffrey Gundlach, recently asserted in a webcast that “nominal GDP growth over the past five years would have been negative is U.S. public debt had not increased.” He went on to state that analysts and financial journalists “seem to not understand that the growth in the GDP it looks pretty good on the screen but is really based exclusively on debt – Government debt, also corporate debt and mortgage debt.” I have been saying this for quite some time because it’s pretty obvious to anyone who looks more deeply into the numbers beyond reciting the headline reports.

The Fed released Q1 household debt numbers two weeks ago. It showed that total household debt grew by $124 billion in the first quarter of 2019, boosted by increases in mortgage, auto and student loan balances. That increase in debt is not translating into economic growth. Part of the reason for the increase in mortgage debt balances is the proliferation of cash-out refinancings, which are now back to 2006-2008 levels (chart sourced from bubblesbottoms.blogspot.com):

Much of this cash-out refinancing is being used to pay off large credit card balances, which does not help stimulate economic spending but it does result in larger mortgage balances per household and lets the consumer “reset” its credit balance for more debt-based consumption. Again, this is similar to what the financial landscape looked like prior to the great financial crisis except it’s worse now.

The above commentary is an excerpt from last week’s Short Seller’s Journal.  In each issue I undress the economic propaganda and provide short ideas, including options plays.  This week I’m featuring a retail-based “unicorn” stock which burns more cash every quarter.  You can learn more about this newsletter here:    Short Seller’s Journal information

Horrifying Comments From A Freddie Mac Phd Economist

The housing market continues show contracting sales volume. April existing home sales fell 0.4% (SAAR – Seasonally Adjusted Annualized Rate) from March and 4.4% from last April. Existing home sales have dropped year-over-year 14 months in a row. This is the worst run since the housing crisis.

Obviously from a seasonal standpoint, if the market were healthy, home sales should be increasing month-to-month notwithstanding questionable statistical “adjustments” imposed on the data by the NAR. Furthermore, existing home sales are based on closings, which mean the report measures contracts that were signed in late February to late March/early April. during this period the 10yr Treasury rate fell from 2.8% to as low as 2.35%. But lower rates are not stimulating home sales in spite of rapidly rising inventory.

This is because the much of the remaining “pool” of potential home buyers can not afford the all-in cost of home ownership in spite of lower financing costs. Almost 30% of all mortgages that Fannie and Freddie underwrote and packed into bonds last year were for home buyers whose total debt payments were in excess of 43% of their gross (pre-tax) income. This metric – the borrower’s DTI – has nearly doubled since 2015. The mortgage/housing market is headed for a repeat of 2008.

New home sales also showed a drop from March. But the March number was curiously revised significantly higher – an upward revision to 723k SAAR. The number is so much higher than any number reported for any month in the last 12 months that it looks comical in the data series. John Williams (Shadowstats.com) referred to the report as “regular nonsense monthly volatility and lack of statistical significance.”   In fact, the jump in new home sales tabulated by the Government does not remotely correlate with mortgage purchase application data released by the Mortgage Bankers Association, which shows a decline in purchase applications that would correspond to April’s new home sales data

NOTE:  new home sales are based on contracts signed.  90% of all new homebuyers use a mortgage. Therefore declining purchase apps would translate into decline new home contract signings.  New homebuilders, for the most part, have been reporting declining new home orders (see Toll Brother’s latest earnings release from last Monday, for instance).

This brings me to an exchange between Texas real estate professional, Aaron Layman, and the deputy chief economist at Freddie Mac – Lawrence Kiefer. It seems that this Freddie Mac executive could not understand by lower interest rates were not translating into higher home sales. This economics Einstein was puzzled that the large pool of millennials were renting rather than buying. It’s pretty clear that this ivory tower dork is clueless about the amount of student debt held by the millennial demographic.  Kiefer suggested to Aaron that higher student debt levels could possibly be net positive for the housing market if it leads to higher incomes. The Twitter exchange between Aaron and Mr. Kiefer has left me speechless. You can read more here: Aaronlayman.com

Perhaps studying this chart might help Freddie Mac’s Mr. Kiefer better understand the basic problem:

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information