The lack of movement for the purchase index underscores the lack of traffic and lack of demand in the housing sector. – Bloomberg News
Once again the Mortgage Bankers Association purchase applications index fell 5% week to week and 9% year over year (LINK). Mortgage rates have fallen 30 basis points over the past month and 10 points over the past week. This is stimulating refinancings but not buying.
Cash/investment buyers disappearing – cash buyers were 24% of new home sales in September this year compared to 33% in September 2013. If the number of buyers who require a mortgage are falling and cash buyers are fading, who is going to buy homes? This situation is exacerbated for new homebuilders, as 93% of a newly built homebuyers use a mortgage.
I wrote an analysis of yesterday’s existing home sales report which goes into detail as to why the reality is much different than the headline reports you may have seen: Existing Home Sales Drop Yr/Yr For the Eleventh Month In A Row.
The homebuilder stocks have bounced back up to a level which is ripe for shorting. My three latest homebuilder reports explain why these homebuilders are particularly good short-sell candidates, especially my latest one: Homebuilder Short-Sell Reports.
These homebuilders are riddled with misleading accounting, excessive inventory and debt levels and declining unit deliveries. They are more overvalued in relation to their underlying business fundamentals than they were at the peak of the housing bubble. My reports go into detail on all of those issues. In short, homebuilders are insanely overvalued.
At the very least, any money manger who is long these stocks has a fiduciary duty to look through my work and reassess their investment strategy with regard to this sector. If you happen to be invested in mutual funds with exposure to this sector, get out now.