Tag Archives: existing home sales

The Housing Market Bubble Is Popping

As with all other highly manipulated data, the financial media has a blind bias toward the “bullish” story attached to the housing market. Understandable, as the National Association of Realtors spends more on special interest interest lobbying in Congress than any other financial sector lobby interest, including Wall Street banks.

New home sales were down last month, according to the Census Bureau, 11.3% and missed Wall Street’s soothsayer estimates by a rural mile. Strange, that report, given that new homebuilder sentiment is bubbling along a record highs. Existing home sales were down 2.3%. You’ll note that the numbers reported by the Census Bureau and NAR are “SAAR” – seasonally adjusted annualized rates. There is considerable room for data manipulation and regression model bias when a monthly data sample is “seasonally adjusted/manipulated” and then annualized.  You’ll also note that mortgage rates have dropped considerably from their December highs and May is one of the seasonally strongest months for home sales.

It’s becoming pretty clear to me that the housing market’s “Roman candle” has lost its upward thrust and is poised to fall back to earth. I believe it could happen shockingly fast. Fannie Mae released its home purchase sentiment index, which FNM says is the most detailed of its kind.

The report contained some “eyebrow-raising” results. The percentage of Americans who say it’s a good time buy a home net of those who say it’s a bad time to buy a home fell 8 percent to 27% – a record low for this survey. At the same time the percentage of those who say its a good time sell net of those who say its a bad to sell rose to 32% – also a new survey high. In other words, homeowners on average are better sellers than buyers of homes relative to anytime since Fannie Mae has been compiling these statistics (June 2010).

Currently the prevailing propaganda promoted by the National Association of Realtors’ chief “economist” is that home sales are sagging because of “low inventory.” He’s been all over this fairytale like a dog in heat. The problem for him is that the narrative does not fit the actual data – data compiled by the National Association of Realtors – thereby rendering it “fake news:”

The graph above shows home inventory plotted against existing home sales from 1999 to 2015 (note:  when I tried to update the graph to include current data, I discovered that the Fed had removed all existing home sales data prior to 2013).   As you can see, up until Larry Yun decided to make stuff up about the factors which drive home sales, there is an inverse correlation between inventory and the level of home sales (i.e. low inventory = rising sales and vice versa).   I’m not making this up, it’s displayed right there in the data that used to be accessible at the St Louis Fed website.

Furthermore, if you “follow the money” in terms of new homebuilder new housing starts, you’ll discover that housing starts have dropped three months in a row. The last time this occurred was in June 2008.   IF low inventory is the cause of sagging home sales – as Larry Yun would like you to believe – then how come new homebuilders are starting less homes? If there’s a true shortage of homes, homebuilders should be starting  as many new units as they can as rapidly  as possible.

Although the Dow Jones Home Construction Index is near a 52-week high – it’s still 40% below it’s all-time high hit in 2005.  Undoubtedly it’s being dragged reluctantly higher by the S&P 500, Dow, Nasdaq and Tesla.   Despite this, I presented a homebuilder short idea to subscribers of the Short Seller’s Journal that is down 13.6% since  I presented it May 19th.  It’s been down as much as 24.2% in that time period.   It is headed to $7 or lower, likely before Christmas.  I also  presented another not well followed idea that could easily get cut in half by the end of the year.

The next issue of the Short Seller’s Journal will focus on the housing market.  I’ll discuss housing market data that tends to get covered up by Wall Street and the media. I have been collecting some compelling data to support the argument that the housing market is rolling over…you can find out more about subscribing here:  Short Seller’s Journal info.

In the latest issue released yesterday, I also reviewed Amazon’s takeover of Whole Foods:

I just read it and the analysis on Amazon is awesome. This has the potential to be the short of year when the hype wanes and reality sets in – subscriber, Andreas

Toll Brothers Stock Jumps On Declining Revenues And Earnings

Toll Brothers reported its Fiscal Q1 earnings this morning.  Year over for the quarter: Revenues declined nearly 1%, operating income plunged 46.8%, net income dropped 4.1%.   Net income was boosted by the reliable accounting management technique of reducing the estimated GAAP “effective” tax rate, which enables any management to goal-seek a specific net income number.  In this case the goal is to “beat” the Street.  Margins were down across the board.

Oh ya, TOL pulled another stunt that homebuilders use to pump up GAAP net income:  it increased the amount of interest it capitalized by $6 million dollars. This has the effect of boosting operating income by $6 million compared to the same quarter last year because it reduces the amount of GAAP interest expense by the amount that was capitalized. It did this despite a drop in sales.   Its net income would have missed the Street by a suburban mile if it had just maintained the same rate of interest expense capitalized.

For this, the stock jumped up 6% this morning at the open.

The Company blamed the drop in operating income and margins on inventory write-downs.  But these have been occurring every quarter recently and will of course continue going forward.  That write-down only explains $4 million of the $44 million plunge in operating income.

There’s so much more going in TOL’s numbers which point to the continued economic deterioration in its business model.  I will be reviewing this further in this week’s issue of the Short Seller’s Journal, including which put options TOL I bought this morning.

Too many layoffs and store closure news to mention but I’ve realized that there are a lot of school-district (including teachers) layoffs and colleges, or even hospitals staff layoffs. CSX just posted 1000 management level position cuts – link.  By the way, thanks for the Short Seller’s journal, very informative. – note yesterday from a subscriber

Fake News Alert: Existing Home Sales Report

I’m going to have to throw a flag on the existing home sales report for November published today by the National Association of Realtors.    The NAR would have us believe that home sales occurred in November at 5.6mm annualized rate for the month, up 15.4% from November 2015 and up .7% from October.   I will point out that, of course, the orignal report for October was revised lower.  But who pays attention to those details?

Take a look at this graphic sourced from Zerohedge which shows existing home sales plotted vs mortgage applications back to 2013:

I hate to be cynical, or accuse anyone of presenting “fake news,” but the mortgage application data completely contradicts the NAR’s “seasonally adjusted, annualized rate” interpretation of the data it collected. Existing home sales are based on closings (escrow clears), which means the sales report for November is based on contracts signed primarily from October and some in late Sept/early November. But mortgage applications began dropping off a cliff in late August. Clearly the NAR’s seasonal adjustment interpretation of the data is highly suspect.

Looking at the data itself  – LINK – you’ll note that the NAR’s data sampling shows that home sales dropped 6.7% from October.  Yet, it’s “seasonal adjustments” suggest that home sales increased from October to November, despite a massive plunge in mortgage applications during the period in which contracts would have been signed for November closings.

I’ve emailed the NAR several times over the years to have them explain their seasonal adjustments calculus.  Every time I am politely declined.  I will note that they use the same regression analysis model used by the Census Bureau.

The annual rate for a particular month represents what the total number of sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonal adjustments, which are determined by using the X-12 Variant created by the Census Bureau, are then used to factor out seasonal variances in resale activity.

They do at least disclose that, although, if anything, that fact detracts from the credibility of their calculations.  Of course, if I were looking for credibility, I would not advertise that I use the statistical guesstimate package created by the Government…

I would suggest that a year from now, anyone who looks back at the data produced today by the NAR will discover that the number was revised lower by a significant amount.  But who looks at revisions?  The Government and industry promotion organizations know this.  It doesn’t matter how far off the rails their initial “seasonally adjusted” data strays, as long as they revise them at some point in the future, when no one is looking, it gives them plausible deniability if they are ever held accountable.

In the next issue of the Short Seller’s Journal, I’m going to present a comprehensive analysis on the housing market and the damage already inflicted on it from a 1% rise in mortgage rates.  Despite the fact that S&P and Dow have been pushing all-time highs almost on a daily basis, the DJ Home Construction index is down over 11% from its July 52-week high.  I will show why in this next issue.  You can access more information and subscribe to the SSJ using this link:  Short Seller’s Journal.

 

More On The Government’s Fraudulent New Home Sales Report

This is from a reader who posted this comment:

I live in “the south” in a very very nice area by the beach.  A “developer” built over 20 new homes and purchased several more lots to build on.  His last home sold 6 months ago and the rest stay EMPTY!  Lock box, not sold, and some for sale signs have been taken off to decrease competition from the other people trying to sell their home.

The average asking price is $500,000 .  The lots are cleared but undeveloped. He put a sign up on one lot to show the home that “could” be built there IF anyone purchased it.
In short… IT’S OVER! WE’RE BACK TO 2007 LOOKING DOWN AT A DEEPER AND STEEPER DECLINE!

I’m beginning to think that the Census Bureau now includes “intent to sell” as a “sale” because I’m sure there’s a lot of people who are thinking of selling of in order  to “get ahead of the market.”  Sorry, it’s too late.

More On Yesterday’s New Home Sales Fraud

As I detailed yesterday – LINK – yesterday’s new home sales report was complete fiction. Notwithstanding all of the other statistical manipulations that go into the Government’s Seasonally Adjusted Annualized Rate of sales metric, including flawed data sampling, Mark Hanson – who does cutting edge housing market analysis – reduced yesterday’s new home sales report to its essence:

A rounded 4,000 more homes sold on a Not Seasonally Adjusted basis than in June, ALL from the Southern region.  This added up to a massive 72,000 month to month and 114,000 year over year Seasonally Adjusted Annualized Rate surge and headlines of “9-year highs,” all due to bogus seasonal adjustments that should not have applied due to the number of weekends in the month…”  – Mark Hanson, M Hanson Advisors

The 4,000 more homes sold in the South month to month more than likely results from flawed data collection, for which the Census Bureau is notorious.  But even assuming that the number is good, the Government’s “seasonal adjustment” sausage grinder translated that into 72,000 more homes sold in July vs June and 114,000 year over year on a Seasonally Manipulated Annualized Rate basis.

Not to pile on to what now should be the obvious fact that the Government’s new home sales report is not more credible than its employment report – both for which the Census Bureau collects the data – Credit Suisse published research earlier in this month for July in which its market surveys showed that:

  •  its “buyer” index declined in July to 40 from 41 in June;
  • expected traffic declined in 29 of 40 markets in July vs 25 in June – including Portland, Seattle and New York experiencing “sharp declines;”
  • “Florida markets remained depressed;”
  • California overall was lower in July

Finally, the Mortgage Bankers Association reported that purchase mortgage demand hit a 6-month low in July.  New Home “sales” are based on contracts signed.   If mortgage applications and contract signings are highly correlated, as 93% of all new home buyers use a mortgage.  If mortgage applications are declining, it means that contract signings are declining.

How on earth is it at all possible that the Government was able to measure a 9-year high in new home sales for July when every other actual market transaction indicator declined, some precipitously?

The housing market is headed south right now.  Inventory is piling up all over metro-Denver, especially in the high-end areas.  Emails to me from readers who are industry professionals all over the country are reporting similar occurrences in their areas.

The Government can populate the news headlines with fraudulent propaganda – something which has become de rigeur – but propaganda and fraudulent economic reports do not generate real economic activity.  At some point the elitists running the system will be at a loss to explain the difference between their lies and reality.  That’s when we’re all in big trouble…

Housing: I’ve Worked Thru 4 Bubbles – They All End The Same

The three primary drivers of the economy are starting to head south:  retail, housing, autos.  I can smell the housing market slipping away now. I’ve been early on housing, like I was when the mid-2000’s Bubble 1.0 popped, but I was eventually very correct (I sold my dream house in November 2004).

The housing market is beginning to crater. I draw on “hands on” data from the Denver area because I can get “boots on the ground” due diligence accomplished. Denver is considered somewhat of a demographic “bellweather” for economic trends as they unfold. I don’t care what the media propaganda is reporting, in Denver housing sales are rapidly slowing, inventory is rapidly building and prices are falling. I’ve witnessed two $2 million+ homes in my area reduce their offer price 14% and 20% respectively shortly after their initial listing.

Ultra-high end resort areas are starting to get killed. Aspen is reporting that sales are down more than 42% in the first-half of 2016 vs. 2015: Aspen’s Sustained Nosedive. Same with Long Island’s Hamptons, where sales volume in East Hampton and Southampton plunged 53% and 48% respectively from a year ago: LINK.

Once the high-end wets the bed, the rest of the market follows very reliably and obediently.

My view is supported by the homes sales data for July reported by Redfin.com last week. According to Redfin, home sales (closings) fell 11% in July:  LINK.  Redfin of course concocts a ridiculous calculus to rationalize the decline, but that’s nothing more than a disconsolate effort to defer acceptance of the unpleasant but inevitable reality.

Perhaps most shocking in Redin’s report is the extent to which the bottom fell out of what had been some of the hottest markets in the country.  Year over year for July closings fell 46% in Vegas, 24% in Miami,  21% in Portland, 20-% in Oakland and 11% in Denver.

I’ve been focusing on the housing market in my weekly Short Seller’s Journal  because the homebuilder and related home construction stocks are no-brainer shorts.  It’s been my view that flippers/”investors” have been the majority of existing home sales volume reported this year.   I have a subscriber who is three decade-plus real estate professional in Denver who is sharing some great insider color on the market, something you will NEVER get from the National Association of Realtors:

You are spot-on the housing market.   I think the flippers in Denver metro are driving the under $400,000 price to a frenzy and the over $500,000 in the burbs are dropping in price. Some of these flippers have 8-10 houses at the same time. A little jiggle and they will dump. Then the part time rental landlords follow in selling as the rental market gets tough

I am selling a $309,000 condo and showing another buyer $300,000-$350,000 houses in the same part of Denver. Condos and houses of the same 1980’s age are not worth the same. Every time the condo and house of same square footage and age get the same price, the prices fall. Condos go down the farthest of anything.

I believe the flippers who are facing getting “stuck” with their inventory will start to panic and look to unload their “investments.”  Many of them are using debt to make their purchases.  This of course will hasten the downturn in housing. This is exactly how the end of the big Housing Bubble 1.0 was triggered.

The current housing bubble is the most extreme of the four bubbles I have witnessed since the late 1970’s.   Prices for new homes have moved above the prices of the last bubble. In many areas, existing home prices are now at all-time highs.  This is despite the fact that sales volume is roughly 2/3’s of the volume of the last bubble.  This activity is occurring amidst rapidly rising inventories.
The next downturn in housing will be worse than the last one because the Government Untitled1has aggressively stuffed as much mortgage debt as possible into the system with its 3% to no-percent down payment programs, reduced mortgage insurance requirements and by looking “the other way” on credit scores.

If the Fed hikes rate in September, as it incessantly insists will definitely possibly happen, it will be lights out for housing.  On the other hand, it can only take interest rates down 50 basis points to zero, probably will not enough stimulate sales because anyone with a high degree of monthly payment sensitivity has most likely already overpaid for their “dream” home.  When the Government introduced 0-3% down payment programs plus subprime programs.

Government Sponsored Mortgages Go Full Retard: 2008 Redux-Squared

This is a note to me from one of my Short Seller Journal subscribers:

As a 20 year real estate agent, investor and wholesaler in Atlanta,  I’d like to add my comment to your analysis. I totally agree that things are not what they seem to be in housing.  I despised the NAR [National Association of Realtors] when I was a member because of their “it never rains” housing reports and their confiscatory attitude toward realtor dues and their subversive political activity.  I eventually gave up my agent’s license when they started forced PAC contributions in 2010.  Edward Pinto of the American Enterprise Institute told me that NAR is spending $55 million a year for lobbying on housing issues. The NAR never met a loan they did not like.

I’ve been working the Atlanta metro housing market since the early 1990’s. I can tell you that this time around is different in that the home buyers I’m seeing in entry level FHA neighborhoods are mostly “minorities” (some are refugees), and virtually every neighborhood in my general area northwest of Atlanta is being sold with 100% financing via USDA loans. There is NO equity in these neighborhoods, and most of the selling prices are as high or higher than 2006-07.  The mortgage fees and costs for things like PMI and funding fees are added into the payment along with ever rising tax and insurance payments. The outcome is not going to be pretty.

I do not know when exactly, but at some point, I’m going to make that massive killing in housing stocks that I missed out on in 2009. I knew that crash was coming as early as 2004, from reading mortgage data, but I did not think to short the home builders! This time I won’t miss.   Enjoy your work very much.

There you have it. That’s the truth from the trenches.  “The NAR never met a loan they did not like.”  But guess what?  All these 3% to no percent down payment mortgages are being subsidized by you, the taxpayer.  Instead of Countrywide originating subprime  nuclear waste and dumping it on Wall Street (and into your pension fund), this home finance scatology  is being sponsored by the Government through Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA.

Now Quicken – through Taxpayer-sponsored Freddie Mac – is offering 1% down payment mortgages (LINK) that also avoid the use of PMI insurance.  The PMI insurance is was a requirement for low down payment mortgages (below 20%), but the NAR and other PACs successfully lobbied to have this requirement removed.  The funds from PMI were put into a trust that was used to help cushion blow when low  down payment buyers defaulted.  It was a thin layer of protection for the Taxpayer.  Now that’s been removed.

Most of the homes being sold to actual buyers are now financed with Taxpayer funded subprime mortgages.  If you note in the article about the Quicken product linked above, it references that these are not considered “subprime” mortgages thanks to rule changes.  We can call a “nuclear bomb” a “snow cone” instead, but it’s still a nuclear bomb.

When a buyer closes on a low down payment house, the buyer is underwater on the mortgage after netting all the costs that are included.  Home prices are not going up as reported by Case Shiller and the Government.   Look around at all but the hottest markets and you’ll see a plethora of “price reduced” offerings.

This is going to get ugly again.  Interestingly, I run into lot of people who agree with me that what’s coming will be worse than 2008.   I reiterated a short on a big homebuilder less than two weeks ago that is down almost 9%.  Despite the general upward push in the SPX since mid-Feb, I’ve had several picks that are down double-digits on a percentage basis, including a mortgage company that’s down 15% since late March, a consumer durables stock down 17% since mid-April and an auto seller that’s down over 18% since early June. This is because the Fed is concerned with propping up the Dow and the S&P 500  for propaganda purposes.  But individual stock sectors are melting down.  The home construction and auto sectors will be a blood-bath.

You can access my research with these ideas here:  Short Seller’s Journal.  It’s a weeklyNewSSJ Graphic  report for $20/month delivered to your email on Sundays. In recent issues I’ve been reviewing past ideas that have not worked since mid-Feb because of the Fed’s market intervention. Many are better shorts now than back then, as conditions in the general economy have deteriorated since then.  I also provide at least one new idea per week.

Subscribers can also access a 50% discount to the Mining Stock Journal.

 

June Existing Home Sales Report: More NAR Promtional Propaganda

It’s happening here too, NE Florida. Lots of inventory in higher priced areas (around $400k), lesser expensive areas are selling but at much reduced frequency. Lots of for sale signs out there and they’ve not come down. I see price reductions now, and still no traffic for sales. It looks exactly what I witnessed 7 years ago!  – reader comment – note:  a colleague of mine who lives on west coast of FLA said the same thing about his area
While the NAR was pleased to report a gain in May over April for its statistically brewed annualized home sales rate for May, it also revised lower its original “guesstimate” for April sales.  In other words, existing home sales are occurring at a slower rate than originally reported.  I would bet that in July when June’s number is reported that the NAR will revise lower May’s report.

The data is distorted due to the “seasonally adjusted annualized rate” calculation.  In theory, existing home sales should be higher than May last year because, with lower interest rates (manipulated by the Fed) and easier access to Government subsidized mortgages (FNM, FRE, FHA, VHA, USDA), the monetary and fiscal policy implementors running the U.S. have made it as easy for someone to buy a home now as it was during the big bubble.  I would argue that the “increase” in reported home sales is fully attributable to “seasonal adjustments”  which become exaggerated when the number is converted into an annualized rate.

Interestingly, the first-time buyer segment of the market took big dip from April.  I have suspected based on my observations of the Denver market that the largest component of homebuyers are investor/flippers.  The data confirm this.  First time buyers were said to be 30% of the buyers in May, down from 32% in April.  Historically, first-time buyers are typically 40-50% of the buying.
Also interestingly, the inventory of homes increased. I would suggest, based in inferences from the data, this is flippers/investors listing their homes.  I have noticed recently signs posted on busy boulevards around Denver that say “Wholesale fix-up homes available.”  This suggests to me that “investors” are scooping up homes ahead of flippers and looking to flip them into flippers.  This is how the peak of the bubble in 2006-2008 looked.
Finally, and perhaps most disconcerting, is the fact that the NAR is now pushing policy proposals which would make it easier for student loan borrowers to take down a Government-sponsored mortgage to buy a home. Nothing like piling more Taxpayer funded mortgage debt on top of an unmanageable amount of taxpayer funded student loan debt in order to let newly minted college-degree’d bartenders and waitresses buy a home…

Housing Sales Start To Tank As Suprime Auto Loan Delinquencies Soar

Note:  For the record, I am expecting the possibility that the new homes sales report for February released today will show an unexpected spike up.  For the past several months, there’s been what I believe to be a pre-meditated pattern in which the existing home sales data series and the new home data series move in the opposite direction.  Let’s see if the trend continues.

The existing home sales data series has become as erratic and unpredictable as the Census Bureau’s new home sales report.  One can only wonder about the reliability of the National Association of Realtors reporting methodology when its Chief “Economist” repetitively states month after month that “job growth continues to hum along at a robust pace.”  Any economist who uses the Census Bureau’s monthly employment report as their evidence that the U.S. economy is producing meaningful, income-producing jobs is either just another propaganda mouthpiece or is of questionable intelligence.  Either way a statement like that is highly unprofessional.

You must be wondering why I’m connecting home sales to the recent data which shows that subprime auto loan delinquency rates are soaring (here and here).  Let me explain.

All cash sales of existing homes in February were reported to be 25% of all sales in February, down from 26% in January.  This means that 75% of existing home sales (93% of new home sales) are dependent on mortgage financing.  The FHA has been underwriting 3.5% down payment mortgages since 2008.  3.5% down payment mortgages are nothing more than sub-prime mortgages “dressed in drag.”  The FHA’s share of the mortgage market soared from about 2% at the beginning of the 2008 to around 20% currently (plus or minus a percent or two).  Fannie Mae and Freddie Mac have been issuing 5% down mortgages for quite some time and lowered the down payment to 3% in early 2015.

If you require a 5% or less down payment to buy a home, you are a subprime credit risk, I don’t care what your FICO score it.

First time buyers represent about 30% of all existing home sales.  A good bet is that the first time buyer segment almost exclusively uses the lowest down payment possible to buy a home.  RealtyTrac issued a report in June 2015 which showed that low down payment purchases hit  a 2-year high in Q1 2015 and accounted for 83% of all FHA purchase mortgages.  Understandably RealtyTrac has not updated this report.  My bet would be that somewhere between 30-50% of all purchase mortgages were of the low down payment variety, or clearly de facto subprime quality.

The Wall Street Journal published an article last year which discussed the rising trend in low to no down payment mortgages:  Down Payments Get Smaller.

This is where soaring subprime auto loan delinquencies come into play.  To the extent that a potential home buyer is behind on his auto loan, it will impede his ability to take out a mortgage of any down payment variety.  In fact, I believe that the U.S. financial system has hit the wall in terms of the amount of debt that can be “absorbed” by potential borrowers. Auto loans and student loans outstanding hit new record highs daily, with both well over a combined $2 trillion outstanding.   In my opinion, this is why existing home sales dropped 7.1% from January, more than double the 3.1% decline forecast by Wall Street.

The National Association of Realtor’s Chief Clown attributes the big drop in home sales in February to “affordability.”  But this is statement seeded either in ignorance or fraud.  Forget the Case-Shiller housing price comic book.  Nearly every major MSA has now entered into the continuous “new price” vortex.  This has been going on Denver since last June.  I’m getting reports from readers all over the country describing the same dynamic in their markets.  This problem is especially acute the high end.  Besides, every mortgage sales portal in existence markets a calculator that take your monthly income and calculates how much house you can “afford.”  Price has nothing to do with ability to get approved for a mortgage.

Speaking of “affordability,”  the cost of financing home dropped to 3.66% in February, it’s lowest rate since April 2015.  In other words, the cost of buying a home actually became more affordable in February.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion”  – Ludwig Von Mises.  The Fed and the Government prevented the collapse of the system that was set in motion by the housing/mortgage market in 2008.  As Von Mises stated, “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion , or later as a final and total collapse of the currency system involved.”

I believe that it is quite likely that the Fed’s ability to push further credit expansion has reached, or is close to, its limits.  The soaring delinquency rates of auto loans and a housing market which is likely beginning to tip over now reflect this reality.

I was early in 2004 when I predicted a collapse in the housing market.  I underestimated Greenspan and Bernanke’s ability to expand mortgage credit.  I was once again early in predicting the demise of the current housing bubble.  Again, I underestimated the Fed’s ability and the Government’s willingness to stuff the average American up to his/her eyeballs in debt.  Regardless of flaws in predictive abilities with regard to timing, my overall analysis materialized in 2008 and it’s a good bet that it’s coming to fruition once again – only this time it is likely that the Fed will be helpless in preventing the inevitable.

A Warning Signal For The Housing Market

PennyMac (PFSI) is a mortgage finance company that describes itself as  a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market.   The stock has been getting crushed and insiders have been dumping shares:

Untitled

The graph above (click on image to enlarge) shows PFSI vs. the BKX banking index.  Other mortgage finance stocks have been getting hammered as well.  That steep decline that started on Dec 24 in the graph above was not accompanied by any news triggers.  In fact, PFSI signed a new “warehouse finance” credit line with Credit Suisse for $100mm at the end of the year.  That should be great news if you are a housing and mortgage finance perma-bull.

When stocks decline steeply with no related news events to set-off the price-drop – and when one of the largest individual holders,  Leon Cooperman, is unloading shares – it’s the market’s way of signalling problems not yet recognized by the peanut gallery.  PFSI reported its Q3 earnings on November 4 and with a cursory glance they looked to be what the market expected.  The stock did not do anything unusual.

The action in PFSI’s stock and in some other related mortgage finance and real estate stocks tells me that the “invisible hand” in the market is signalling a significant downturn coming in both home sales volume and mortgage finance volume.  Per the invaluable work of John Williams (Shadowstats.com), when you remove the statistical manipulation and annualization of the existing home sales report for December, it turns out that existing home sales evaluated on an unadjusted monthly basis for the fourth quarter was down 20% from the third quarter.  That’s  not something that you’ll hear about or read in mainstream media or on venues like Seeking Alpha or Realmoney.com or the Motley Fool or Business Insider.

That is what I believe the market is seeing and is why stocks like PFSI are taking a beating outright and relative to the overall banking sector.   Anecdotally, I just got a call from a friend who told me house that would have sold for $620k on his block last year was put on the market two weeks ago for $599.  The neighbors all thought the price was too low.  Two weeks later, today, the price was lowered to $579.  I bet that price will be lowered at least once or twice more before it sells.  And this is an area that was still seeing bidding wars last summer.

UntitledSometime in the next few weeks I’ll be featuring another mortgage-related stock in my Short Seller’s Journal that still has a LONG way to fall before it gets back to its 2008 great financial crisis, pre-QE price.  My picks this week are significantly outperforming the market.   SHORT SELLER’S JOURNAL