We know that inflation is running a lot higher this year – true inflation, that is, and not the phony Government CPI. Thus, low inflation would not explain the 80 basis point drop in long bond yields since January 1st. “Flight to safety” would flow either into the very short end of the yield curve or into gold or under the mattress. Therefore, it is apparent to me that the Treasury bond market is starting to price in economic armegeddon. This will mean deflation of asset prices (stocks, homes, crappy Wall Street concoctions) but not necessarily deflation of necessities.
With retail sales, auto sales, and home sales all collapsing, the only explanation left is that the Treasury bond market is pricing in a severe economic downturn. This would explain also why high yield bond spreads have widened considerably over the past month. The big drop in oil prices this week would further affirm this.
For anyone who is reading this and has invested in my Easy Trade Idea from the end of July, I used to today’s low volume pullback in the stock to add to our position in the fund by shorting slightly in the money puts that expire tomorrow. If the price closes below the strike tomorrow, we will take delivery of more shares with a cost-basis reduced by the amount of put premium we collected today.
Mortgage purchase applications dropped 5% last week. They were down 15% year over year for the same week in May. This is May. May is supposed to be the second or third strongest seasonal month for home sales. Purchase apps have been down 7 of the last 9 weeks. This is occurring in the strongest part of the year for housing. There’s no bad weather “issues” and, as I’ll show below, inventories are starting to climb quickly.
Purchase mortgage applications are based on contract signings. The Census Bureau measures new home “sales” on contract signings. 93% of all new homes are purchased using mortages. This means new home sales for May will disappoint when they are released next week. Existing home sales are based on closings. Closings take about 30-45 days right now (note: time to close is shorter than a year ago – less volume to process). This means June’s existing home sales report in July will be bad.
Flippers are going to be stuck with homes. They rely on traditional, mortgage-financed buyers in order to flip. I saw a big sign on a corner of a very busy intersection in a prime are of Denver that said, “investment homes for sale.” That’s a flipper looking to flip to other flippers.
I just published an article titled: Are Home Prices About To Tumble on Seeking Alpha. I have detail four unmistakable signs that tell us the housing market is dying. It will soon be dead on arrival…
Economists and Wall Street are missing badly now on their forecasts for everything. Way too optimistic. Today’s current account deficit was the perfect example. They missed by a significant amount. Hack meteorologists like Al Roker are blushing for them. The economy will show even more of a contraction in Q2 than in Q1. Housing is leading the way down.
For the last six months we’ve had to listen to Wall St. analysts and homebuilder industry pimps like Larry Yun of the National Association of Realtors feed us the fiction that housing sales have been slow due to bad weather and low inventory.
Well the weather is fine now and Redfin – the online national real estate brokerage fjrm just published this: Home Listings Hit 4-Year High in May, But Demand Didn’t Keep Pace
Home listings were up 9.1% in May – the highest number of listings in 4 years but homes sales were down 10%. You can read the full report here: Higher Inventory, Lower Sales
So much for the National Association of Realtors’ best imitation of J.R. Tolkien…
The truth is, the economy went negative in Q1 and will prove to have gone even more negative in Q2, led by housing, auto and retail sales decline…
I’m not sure why the market gets excited whenever there’s a seemingly “bullish” housing starts number released. For sure, in a truly healthy housing market a strong starts number reflects a positive builder outlook and healthy demand.
The details of Friday’s housing starts data showed that single-family home starts were flat from March to April. This is consistent with the plunge in the builder confidence metric released earlier last week.
The big “jump” in starts was for multi-family rental buildings. The problem with this is that, as is now evident all around Denver, there will soon be a glut of rental units on the market – both single family homes and apartments. We know big investment funds have stopped buying homes to rent out and this is why existing home sales are plummeting. But I’ve also noticed that several new big buildings that have come on-stream in Denver and the surrounding metro area are now offering move-in incentives, indicative that supply is beginning to out-strip new demand.
I published an article for Seeking Alpha which goes over the housing starts data in detail. You can read it here if you are interested in the facts: The Housing Starts Data Is Bearish.
I have a feeling my interpretation of the data is likely accurate because the homebuilder stocks initially spiked higher on the headline reports but sold off to close flat on the day, despite a .5% move higher by the S&P 500.