Tag Archives: debt defaults

New Home Sales Plunge 11.4% In April

So much for the jump in the builder’s confidence index reported last week.  The Government reported a literal plunge in new home sales in April.   Not only did the seasonally manipulated adjusted annualized sales rate drop 11.4% from March, it was 6% below Wall Street’s consensus estimate.

Analysts and perma-bulls were scratching their head after the housing starts report showed an unexpected drop last week after a “bullish” builder’s sentiment report the prior day.

The Housing Market index, which used to be called the Builder Sentiment index, registered a 70 reading, 2 points above the prior month’s reading and 2 points above the expected reading (68). The funny thing about this “sentiment” index is that it is often followed the next day by a negative housing starts report.  Always follow the money to get to the truth. The housing starts report released last Tuesday showed an unexpected 2.6% drop in April. This was below the expected increase of 6.7% and follows a 6.6% drop in March. Starts have dropped now in 3 of the last 4 months. So much for the high reading in builder sentiment.

This is the seasonal period of the year when starts should be at their highest. I would suggest that there’s a few factors affecting the declining rate at which builders are starting new single-family and multi-family homes.

First, the 2-month decline in housing starts and permits reflects new homebuilders’ true expectations about the housing market because starts and permits require spending money vs. answering questions on how they feel about the market.  Housing starts are dropping because homebuilders are sensing an underlying weakness in the market for new homes. Let me explain.

Most of the housing sale activity is occurring in the under $500k price segment, where flippers represent a fairly high proportion of the activity. When a flipper completes a successful round-trip trade, the sale shows up twice in statistics even though only one trade occurred to an end-user. The existing home sales number is thus overstated to the extent that a certain percentage of sales are flips. The true “organic” rate of homes sales – “organic” defined as a purchase by an actual end-user (owner/occupant) of the home – is occurring at a much lower rate than is reflected in the NAR’s numbers.

Although the average price of a new construction home is slightly under $400k, the flippers do not generally play with new homes because it’s harder to mark-up the price of a new home when there’s 15 identical homes in a community offered at the builder’s price. Flippers do buy into pre-constructed condominiums but they need the building sell-out in order to flip at a profit. Many of these “investors” are now stuck with condo purchases on Miami and New York that are declining in value by the day. The same dynamic will spread across the country. Because flipper purchases are not part of the new home sales market, homebuilders are feeling the actual underlying structural market weakness in the housing market that is not yet apparent in the existing home sales market, specifically in the under $500k segment. This structure weakness is attributable to the fact that pool of potential homebuyers who can meet the low-bar test of the latest FNM/FRE quasi-subprime taxpayer-backed mortgage programs has largely dried up.

Second, in breaking down the builder sentiment metric, “foot-traffic” was running 25 points below the trailing sales rate metric (51 on the foot-traffic vs. 76 on the “current sales” components of the index) In other words, potential future sales are expected to be lower than the trailing run-rate in sales. This reinforces the analysis above. It also fits my thesis that the available “pool” of potential “end-user” buyers has been largely tapped. This is why builders are starting less home and multi-family units. The only way the Government/Fed can hope to “juice” the demand for homes will be to further interfere in the market and figure out a mortgage program that will enable no down payment, interest-only mortgages to people with poor credit, which is why the Government is looking at allowing millennials to take out 125-130% loan to value mortgages with your money.  We saw how well that worked in 2008.

Finally, starts for both single-family and multi-family units have been dropping. The multi-family start decline is easy to figure out. Most large metropolitan areas have been flooded with new multi-family facilities and even more are being built. I see this all around the metro-Denver area and I’ve been getting subscriber emails describing the same condition around the country. Here’s how the dynamic will play out, again just like in the 2007-2010 period. The extreme oversupply of apartments and condos will force drastic drops in rent and asking prices for new apartments and condos to the point at which it will be much cheaper to rent than to buy. This in turn will reduce rents on single-family homes, which will reduce the amount an investor/flipper is willing to pay for an existing home. Moreover, it will greatly reduce the “organic” demand for single-family homes, as potential buyers opt to rent rather than take on a big mortgage. All of a sudden there’s a big oversupply of existing homes on the market.

The quintessential example of this is NYC. I have been detailing the rabid oversupply of commercial and multi-family properties in NYC in past issues. The dollar-value of property sales in NYC in Q1 2017 plummeted 58% compared to Q1 2016. It was the lowest sales volume in six years in NYC. Nationwide, property sales dropped 18% in Q1 according Real Capital Analytics. According to an article published by Bloomberg News, landlords are cutting rents and condo prices and lenders are pulling back capital. Again, this is just like the 2007-2008 period in NYC and I expect this dynamic to spread across the country over the next 3-6 months.

This is exactly what happened in 2008 as the financial crisis was hitting. I would suggest that we’re on the cusp of this scenario repeating. Mortgage applications (refi and purchase) have declined in 6 out of the last 9 weeks, including a 2.7% drop in purchase mortgages last week. Please note: this is the seasonal portion of the year in which mortgage purchase applications should be rising every week.

The generally misunderstood nature of housing oversupply is that it happens gradually and then all at once. That’s how the market for “illiquid” assets tends to behave (homes, exotic-asset backed securities, low-quality junk bonds, muni bonds, etc). The housing market tends to go from “very easy to sell a home” to “very easy to buy a home.” You do not want to have just signed a contract when homes are “easy to buy” because the next house on your block is going to sell for a lot lower than the amount you just paid. But you do want to be short homebuilders when homes become “very easy to buy.”

The above analysis is an excerpt from the latest Short Seller’s Journal.  My subscribers are making money shorting stocks in selected sectors which have been diverging negatively from the Dow/S&P 500 for quite some time.  One example is Ralph Lauren (RL), recommended as short last August at $108.  It’s trading now at $67.71, down 59.% in less than a year.  You can find out more about subscribing here:  Short Seller’s Journal information.

The Economy Is Tanking – Inflation/Obamacare Attacking The Middle Class

The economic reports continue to show an overall rate of deterioration in economic activity down to levels – in general – comparable with the 2008-2010 period.  Freight transportation activity is part of the “nerve center” of the economic system.   The latest data from Cass shows a rapid decline in both freight shipments and expenditures that began in mid-2014:

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As you can see, expenditures plunged 10.1% year over year.  North American freight shipments reflect all economic activity at all levels of the economic system across a broad spectrum of industries.

Retail sales reports going back to December 2014 are signalling economic stress at the household level:   “During normal economic times, annual real growth in Retail Sales at or below 2.0% signals an imminent recession. That signal basically has been in play from December 2014, based on industrial production, retail sales and other indicators), suggesting a deepening, broad economic downturn” (John Williams, Shadowstats.com)

This financial stress at the household level is beginning to show up in credit delinquencies and defaults.  Last Tuesday Synchrony Financial reported an unexpected spike in its credit card charge-off rates:  Rising Credit Card Defaults.   As I’ve detailed in prior posts, auto loan delinquencies and defaults are beginning to accelerate.  I’ve covered a couple of credit and credit-related companies in my Short Seller’s Journal , one of which is down 18% since I featured it on March 20th. This is a remarkable fact given that the S&P 500 is up 1.5% in the same time-frame.   When the stock market rolls over, this stock will drop at least 50%.

Although the latest retail sales report last week showed a small gain month over month, the unexpected gain was fueled almost entirely by the rise in gasoline prices.   The Government CPI report does not show much inflation, because the Government goes out of its way to not measure inflation.

The Government’s methodologies used to hide real inflation have been dissected ad nauseum by this blog and many others over the years.  Instead, I wanted to share a write-up a friend and colleague of mine sent me which elegantly describes the truth about inflation and Obamacare and the affect both are having on the average American household:

There’s a huge disconnect between the Government CPI report and true inflation. May wholesale gas prices were flat while the Commerce Dept reported that May gasoline sales for retail sales purposes went up 2.1%. Implies 2% usage higher which might tie in with how, with lower gas prices earlier this year there was the shift to the lower mileage bigger vehicles, or could be more driving.

However, April gas prices according to CPI were up 8.1% but wholesale prices were up more like 14% in April. So the CPI price increase is 57% of the futures price increase. Apply the “lower inflation” to revenues driven by inflation and that’s how GDP gets overstated.

There a lot of moving pieces in the data charade. CPI is reported later this week (June 16th) and it will be interesting to see whats reported for gas. I looked at this a few years ago and found stark inconsistencies between the price level used by the Government in its CPI index vs wholesale gas prices, which are futures based.

The other issue is in food. This is where the CPI index substitution comes into play that John Williams (Shadowstats.com) talks about. My own index includes “outside skirt steak” which is approaching $20 a pound, where I used to pay $5-7 a pound a few years back. So we actually bought/substituted rib eyes at 10 bucks a pound. From an inflation perspective, if that got into the counting, I reduced my inflation by 50% (we later bought hamburger meat at Sams for 2.79 a pound so in the month we cut out our personal CPI on meat by 85%-although we moved to lower quality products). Another issue was cereal–which I used to buy regularly at Walmart early this year at $2.50 a box and it’s now $3.30 a box (32% price inflation).

So, what’s the point?

The point is that there is getting to be some serious inflation in food and somehow its not showing up in the Govt data. In addition, with all the variability with sales and type of stores and how the GDP, Jobs or CPI surveys are created–less than scientific, the government can drive whatever reporting outcome it wants and it’s virtually impossible for anybody to follow.

Regardless of how gasoline pricing is showing up for various Govt reports, between the higher cost of gas and food, and lower earnings in general, people are getting more and more stretched especially as healthcare, education and housing costs go much higher.

This latest retail sales report did confirm home improvement is now declining (big ticket items and durable goods), which had been one of the few bright spots in retail. I am also guessing that there is a shift in overall spending to necessities. The huge increases in Healthcare premiums is pretty significant for a family along with co-pays and deductibles. Practically speaking the middle class is getting attacked. There are not enough ultra-high income earners who can carry the economy.

The S&P 500 made another failed run at an all-time high earlier this month.  If the Fed was not aggressively preventing any down-side momentum from gripping the stock market, there would like be a stock market crash.

The U.S. financial and economic system is inching toward an abyss that is much deeper and darker than the abyss into which it plunged in 2008.

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