Tag Archives: homebuilders

A Quick Note On Today’s Existing Home Sales Report

What about the biggest rise in existing home sales on record in December? These guys are offending my sensibilities. By virtue of all the fake statistics and bogus market action, there has to be something seriously wrong right now.  –  John Embry email to IRD

Existing home sales are based on a sample estimate of contract closings.   The actual “sale” took place when the contract was signed 30-45 days ago.  The headline report is based on a “seasonally adjusted annualized rate.”  The big farce about statistics, away from the obvious fact that “seasonal adjustments” are a polite way to say “statistically manipulated,” is that the metrics reported in terms of percentage changes can make an economic report sound a lot better than the underlying reality.

The underlying reality in today’s report is that allegedly a technical glitch cited by the NAR pushed some closings from November into December and therefore artificially depressed the November number and  artificially inflated the December number.  This is only part of the explanation for the 14% seasonally adjusted annualized rate of increase for December vs. November.   The balance of the 14% seasonally adjusted annualize rate metric is most likely attributable to the “seasonally adjustments” applied to the sample data.  It’s analogous to taking the scraps of pig of the slaughterhouse floor and putting these scraps though a grinder to produce “sausage.”

By the way, does anyone find it a bit suspicious that a “seasonally adjusted annualized rate” metric is used to describe what may or may not have occurred during one month? Think about that.

Notwithstanding this statistical smoke and mirrors, pending home sales for November dropped 1% vs an expected rise of .7%.  Pending home sales are contracts signed, most of which evolve into closings, which become existing home sales.  Some of this decline in pending home sales should have been reflected in December’s existing home sales – in other words, it calls into question the credibility of the existing home sales report.

Furthermore, the November pending home sale number should translate into lower closings, i.e. existing home sales, for January.  That latter assertion relies on an unwillingness of the NAR to completely lampoon the statistics for January’s report- an assumption that may be highly naive based on the degree to which the NAR has been adulterating the statistics for at least the last year.

One last thing.  If you find yourself wanting for some intellectual entertainment this weekend, compare the commentary from the NAR’s Larry Yun in the Pending Home Sales report and his commentary in the Existing Home Sales report.   It epitomizes the phrase, “through the looking glass.”

The homebuilder stocks are rebounding right now on the back of that rigged existing home sales report.  One of the featured stocks in this week’s report will either be a homebulder or a homebuilder supplier.  The last h/b supplier I featured is now up (i.e. down in price) over 13% from the 12/7/15 report.  The last h/b I featured 2 weeks ago is now down 8%.  You can access my Short Seller’s Journal here:   SSJ Subscription

 

This Homebuilder Could Default In 2016

UPDATE: This stock is down over 3% today and headed lower

I was responsible for forecasting at Toll Brothers during the peak bubble years. My forecasting model showed a massive downtrun coming. The CFO refused to look at and consider my forecast.  Bob Toll ignored the signs and bought $1 billion of land at the peak in 2006. I saw the writing on the wall and quit before the brown stuff hit the fan I left the company to dodge the coming storm. Toll then lost money for 14 quarters in a row…It’s about to happen again.  – email yesterday from a well-known blogger

We’ve seen four homebuilders report their quarterly and or fiscal year end results so far. Two builders showed considerable unit volume delivery declines and two reported increases.  Going forward from here it will be all down hill.

In revising and updating my stock report for one particular homebuilder, I discovered that this Company has a huge debt repayment in second half of 2016.  This company must be worried about that because for the first time since 2012, it did not add homes to its inventory, it only replaced what it sold.  It’s cash balance still declined significantly year over year.

The stock is still down 22% from its price when I first published this report.  Even if I’m still early BlogPicon my call for the overall market, and I’m more confident everyday that the market is in trouble, this Company’s stock will likely head lower.   The section on prudent capital management and using options (puts and calls) has been updated to reflect my current suggestions.

Despite an increase in both price and unit deliveries, this Company’s operating income declined year BlogLOGOover year for its fiscal year.  That fact alone tells us that something is wrong with the way this Company operates.  Imagine that, in the greatest new home price inflationary environment in history, this Company is still having trouble generating a profit.

You can access this report here:  This Homebuilder Could Face Involvency In 2016.  The section on prudent capital management and using options (puts and calls) has been updated to reflect my current suggestions.

Short This Homebuilder Bounce

Last week and the week before, Pulte and Calatlantic (Ryland/Std Pacific merger) reported their latest fiscal quarter.  Both companies reported a decline in homes delivered to buyer (closings).  This was consistent with the new home sales reports, overall, for the 3-month period.  The home builders were hit after both of these reports, taking the DJUSHB from 600 down to 560 – or 6.7% – over the next 13 trading days.  Beazer is still down 20% from when I first posted the original research report.  It’s headed to zero, or close to it.

Yesterday DR Horton reported its Q4/Fiscal yr-end results and Beazer reported the same today.  While DHI “beat” earnings by a penny, it missed on the Street’s revenue estimates. Beazer missed on its revenue estimate.  It’s earnings vs estimates is useless because Beazer decided to dump $323 million – or more than 10x its operating income for the quarter – of non-cash “tax benefits” into its net income calculation.

While both companies, contrary to Pulte and Calatlantic, showed an increase in units delivered/closed, further analysis I’m sure will show some extreme measures were implemented in order to move inventor.  I’ll will have updated research reports on both and special research report offer sometime over the next couple of days.  If you want a head-start, I would suggest taking a look at this report, which will not be part of the research report special:  RED FLAG ALERT FOR THIS HOMEBUILDER

However, interestingly both homebuilders stopped investing in new inventory.  By this I mean on a net basis, they both reduced their inventories quite a bit during their Q4.  If the outlook for the housing market is extremely optimistic – per the NAHB builder “confidence” report – how come these two homebuilders reduced their inventory after building them up to levels that exceeded their 2005/2006 housing bubble peak levels?

On a quick glance at Beazer’s numbers, its margins took a hit during the quarter, which means it was offering its homes at a big discount.  DHI’s cancellation rate during the quarter popped up to 27% vs 23% for all of 2015, which is a huge red flag.  Among other indicators, it means that DHI’s reported order book is highly over-inflated.   BZH’s cancellation rate also increased during Q4.

Furthermore, DHI’s Numbers were not nearly as strong as the headlines in their press release. They “beat” by a penny, but there were several somewhat arbitrary non-cash adjustments that gave them the leeway to engineer a “beat.”  It also looks like like they underwrote the mortgages for a lot of their buyers which means they financed subprime buyers to the hilt. We know this because their “mortgages held for sale” jumped nearly 50% year over year. If these were conventional, non-subprime mortgage, they would be able to off-load onto FNM/FRE and not hold them for sale.   It also means that there will be mortgage loss write-offs in DHI’s future.

It’s highly likely that this quarter will be the “last hurrah” for homebuilder sales volume and rising prices.   Most Americans are sliding into insolvency and it looks like the Fed/Government has saturated the last of the population that makes enough money – for now, anyway – to support the monthly cost of home ownership.  For example, read this report:  Most Americans Are Too Broke To Afford To Buy A Basic Home.

Next Up:   Another bailout of Fannie Mae and Freddie are inevitable and the FHA will require one as well (FHA was 2% of the mortgage market in 2008, it’s 20% now).

Peak Housing Market Propaganda

I was chatting with an Denver-based real estate professional yesterday.  This person stated outright that the real estate market was in an insanely overvalued bubble that was going to pop.

It’s pretty obvious to anyone who makes the decision to look at the facts.  For instance, the media, Wall Street and industry association promotional juggernauts (National Association of Realtors, National Association of Homebuilders) continue to gloat over the supposed continuous price increases being reported by highly statistically unreliable data series like the Case-Shiller housing price index (Even Robert Shiller has admitted to this series’ flaws in the past).

Every metric promoted in the headlines is based on “year over year” comparisons.  A far different truth emerges when you shine the light on month to month changes in price.  In fact, I linked an article in a blog post earlier this week (LINK) which showed that 30% of all homes across the major MSAs lost value over the last year.  In many markets, prices have been declining for most of this year to date when measured serially month to month.

In just about any market across the country, if you closed on a home in June and used a 10% or less down payment, you are now underwater on your mortgage.  That’s a fact agreed upon by my friend mentioned above.

Aaron Layman, based in Houston and one of the few truly honest real estate professionals, posted commentary today which shows just how extremely misleading media reports about the real estate have become.  His example uses the Houston condo market, but the same type of relative numbers apply to most large MSAs:

  • Annualized sales of townhomes/condos are down 1.6 percent, but inventory is up 12.9 percent.
  • Annualized sales of highrise condos are down 14%, but inventory is up a 16.1 percent!
  • The median price of combined new and existing highrise construction is down 11.6 percent.
  • The median price of new highrise construction in Houston has shown ZERO appreciation from last year!
  • Annualized sales of new highrise condos are down a stunning 75 percent!
    Inventory of new highrise condos in Houston is up 44.2 percent!
  • MLS shows 111 months of inventory for new highrise construction in Houston!

You can read all of Aaron’s commentary here:  LINK

That same dynamic is definitely occurring in Denver.  And the non-stop rise in rent prices being reported all over the place is just outright wrong.  Nearly every building in Denver is offering some type of rent concession to sign a year lease, with some offering up to two months free.  Denver has been cited as allegedly one of the hottest markets.

The homebuilders are more overvalued now than they were at the peak of the housing bubble.  We’ve already seen one homebulder stock lose over 9% in one day.  I happened to have published a research report on this company about 4 days before it reported.   You can still take advantage of the significant amount of downside that remains in this stock, which is loaded with red flags – including an ongoing IRS audit:   RED FLAG ALERT HOMEBUILDER

Pulte Home Misses By A Country Mile

Pulte Home missed its Wall Street earnings nut by 10 cents. It would have been more had the Company not continued to burn shareholder cash with another huge quarterly share buyback. Closings were down 6% for the quarter year over year and the Company’s book value continues to plummet.  But, of course, they promote “orders.” “Orders” don’t mean a thing in a business model for which cancellations run 15-20%. Yes, upper management continued to dump shares into the Company’s share buybacks…

The Fed has handed the entire housing a multi-trillion gift in the form of a $2 trillion injection of printed money directly into the mortgage market and a zero-percent interest rate policy that has produced record low mortgage rates. Plus the taxpayer has, unwillingly subsidized down payments and interest costs, as all three major Government-backed mortgage entities are offering 3% down payment mortgages.

PayPalPicFor PHM to screw this up means that the Company’s management is incompetent. If you had purchased by latest homebuilder report when it was published you would be sitting on 6% gains in two days outright and even more if you played puts.  (click on the image to the left to access my stock report)

But this is just the beginning for PHM and my report explains why there’s an easy $10 of downside in this stock. This graph tells us everything you need to know about the true fundamentals of the housing market – even in an environment in which the Fed and the Government is literally shoveling money at the housing market as means of trying to prop up the economy, over the last 5 years the homebuilder stocks have underperformed the S&P 500 by 70%:

SPXvsHomebuilders

Existing Homes Sales Drop 3x Faster Than Expected

Existing home sales for August were released Monday.  They declined nearly 5% from July, with July revised down from the original report.  The brain trust on Wall Street was expecting a 1.3% decline.

It was only a matter of time before home sales started dropping again.  But a drop of this magnitude in August took me by a bit of surprise.  Of course, the National Association of Realtor’s chief “economist” offered pathetic excuses for the hammer applied to home sales in August with half-truths, distorted truths and omission of facts.   I was actually a bit shocked by the transparency of his apologies for the highly disappointing report.

For instance, every month he blames disappointing sales on low inventory.  The NAR is showing 5.2 months of supply as of the end of August.  However the inventory jumped to 5.2 months of supply from 4.9 months in July.  And the NAR inventory numbers are lagged by a couple months and do not include “coming soon” listings, which are listings exclusive to the listing broker for typically 30 days before they hit the MLS database.

Furthermore, based on what I’m seeing all over the metro-Denver area, the number of new listings accelerated toward the latter half of August and continued to increase on a daily basis throughout September.  This is interesting because typically listings tail off toward the end of the summer as families focus on back-to-school and then the holiday season. Even worse for the market, price reductions are hitting the market at an alarming rate.  It reminds me of 2007-2008 in Denver.

I get emails from readers describing similar observations in several other cities.  If you are not seeing what is going on in Denver, stay tuned because it is “coming soon.”  If the demographic pattern is similar to the pattern that developed when the housing bubble popped, Denver’s market was hit earlier than most of the other top-20 MSAs, the what is occurring in Denver with regard to an inventory pile-up will soon be all over the country.

The headline numbers and the data referenced by the NAR’s chief “economist” are “seasonally adjusted” and converted into an annualized rate of sales.  Any distortions in the data are exacerbated by when monthly data is converted into an annualized rate.  But let’s take a peek at the “unadjusted” data as reported by the NAR.

On an unadjusted basis, existing homes sales dropped 8.3% from July.  YTD there were 3.55 million homes sold. Compare this to the 5.3 million “adjusted, annualized rate.”  In order to cleanse “seasonality” out of the unadjusted monthly comparison, I looked at what happened from July to August in 2014.  Last year for the two month period home sales fell 3% on an unadjusted basis month to month.  In other words, the month to month drop this year is quite bit worse than it appears in the headlines.  The months’ supply at the end of August 2014 was 5.6.  Just for the record, in 2013 unadjusted sales from July to August were flat, declining by 1,000 homes.

Perhaps most interesting is the fact that the annualized, adjusted  sales rate in August 2015 was 5.2% below the same number that was reported in 2013.   Interesting that Larry Yun leaves that comparison out of his pathetic apology for a housing market report that was likely even much worse than was featured by the headline-regurgitating mainstream media.

Unlike Larry Yun, who seemed to make shameless love to the numbers, the stock market apparently hated the existing home sales report.  On a day when the S&P 500 closed up almost 9 points, the homebuilder index fell 1.3%:

Graph1

The homebuilders popped at the open on the heels of Lennar’s Q3 earnings report, which was mostly hype backed by little substance.  The homebuilder index dropped a bit on the horrific existing home sales reports but remained in positive territory.  It would appear that it took the smart money about 90 minutes to analyze and absorb the sales report, because around 11:30 EST, the homebuilders fell of cliff.

I’m expecting home sales to drop at a faster rate going forward for several fundamental economic reasons.  I’ll have a lot more analysis and commentary on this later this week.

The Housing Market Is Toast

Don’t take if from me, take it from honest industry professionals:

Plenty of volatility to come for the home builders. I received a text from a major national builder this week letting me know they would take $90K (14 percent) off of the listed price for one of their inventory homes. Several Katy/West Houston neighborhoods rolling over on price as inventory builds in the upper price segments.

While industry pundits and the marketing arm of the local real estate board keep telling everyone things are fine, the underlying fundamentals continue to deteriorate. – Aaron Layman, Aaron Layman Properties, Houston, TX

It’s not just Houston, I receive emails from readers all over the country with similar stories. Most of them are from people who were able to sell before the summer started and now are seeing a literal avalanche of homes “stuck” on the market.

Note:  The National Association of Realtors’ inventory data is severely lagged and based on sketchy data surveys.  Also, it would not include “coming soon” homes, which are a one-broker exclusive and not put in the MLS system for at least 30 days.  There is a literal plethora of “coming soon” homes in Denver.  Real estate brokers are glorified car salesmen.  They sit somewhere on the ethics scale between Best Buy electronics salesmen and Wall Street fraud pimps.

The homebuilders rolling over here.  The pop in price over the last two days was a function of the enormous Fed intervention in the equity markets.  Despite one Fed officials hint of possible negative interest rates today, the homebuilders are red:

Homebuilder StocksMy homebuilder reports give you a unique insight into why these stocks are extremely overvalued and have a long way to fall. The two reports on my “sidebar” to the right show why these two stocks will hit the wall sometime in the next 24 months, if not sooner.

You can access my reports here – the price is going up once I get them updated.  Anyone who buys now (or previously) will receive the updates upon request:  HOMEBUILDER REPORTS

Each report takes a in in-depth look at the questionable accounting games being played by these homebuilders, shows why they are burning cash and contains trade management advice and suggestion for how to use puts and calls.

Here’s the extra good news:  Jim “Mad Money” Cramer has been pounding the table on the homebuilder stocks!  You know what that means…

Econ Nazi To Homebuilders: “No Soup For You” – Lumber Is Limit-Down

Buyer of my homebuilder research:   I’ve never gotten a bigger return for the value. Paid $25 pay for the report,  invested $4k in KBH Jan 15’16 $15 put since August [2014] and closed today [mid-Jan 2015] for $3.2k profit.

The price of lumber is the “tell-tale” of the tape.  It sold down hard early in the year and got a manipulated dead-cat bounce along with oil.  It’s limit-down today and headed back to multi-year lows:

Untitled

Homebuilder sentiment peaked in mid-2005, just in time for Dow Jones Home Construction Index to plunge from 1,039 to 140 over the next 3 years – click to enlarge:

UntitledOutside of AMZN and private Silicon venture plays – which can’t be shorted – the homebuilder sector is THE best sector of the market to make a lot of money shorting. My reports will help you understand why:
HOMEBUILDER SHORT SELL REPORTS

This sector has more debt and more overvalued inventory than it did at the peak of the market in 2005/2006.  The p/e ratios are several multiples higher.  The last of the public has gorged on easy credit and “easy flips.”  This will be worse than the bear that started in 2005/2006 – the second leg down in bear markets always is…

Once I get my reports updated, I will be raising the price.

New Home Sales Report: Epitome Of Government Fraud

I like the way Zerohedge refers to today’s Census Bureau tragicomedy on new home sales:

New Home Sales Data Goes Full Retard With Report Frozen Northeast Saw 153% Surge:   The (third) reason why today’s data is just absolutely seasonally-(un)adjusted garbage is because somehow, even when all the other housing data would have us believe the Northeast was a barren wasteland of snow and freezing soil, New Home Sales in February in the Northeast rose from 17K to 43K, an increase of 153%!

I will have much more to say on this later.  But anyone looking to make money off today’s new home sales report from the Government’s Census Bureau should short this spike up in the homebuilders.  It will fade – probably quickly.

Even Bloomberg is questioning the Census Bureau report:

The figures are based on a small sampling of builders which makes them subject to revisions. The report showed the confidence interval for last month’s reading was plus or minus 15.2 percent. That means there was a 90 percent chance the change in sales in February was between a decline of 7.4 percent and a 23 percent advance.  – Bloomberg

The Government report was at complete odds with yesterday’s existing home sales report from the NAR.  I have demonstrated in detail previously that the Census Bureau numbers are not credible in general.  I’ll have more later on this tragic farce but I know from a contact in Texas who is a real estate broker that Houston’s new home sales in February were DOWN 20% year over year.

Drop In Pending Homes Sales Portends Bigger Drop For Housing Market

I know, I know I’ve been radio silent on the precious metals sector.  That’s because there’s nothing constructive for me say right now given the extreme level of intervention going on and everyone can read rants about that ad nauseum on a lot of other blogs.  I will say that I believe the relentless take-down of the metals using massive quantities of paper gold (Comex futures, LBMA forwards) is throwing off the rotten stench of extreme desperation.  I have my views on why, which I’ll share later.

Meanwhile, there is area of the market that is very ripe for making money – shorting the housing market.  And this strategy has produced pretty good returns since early 2013.  And it will produce even better returns as the natural force of the market’s fundamental “gravity” gets its grip on the helium – helium in the form of printed money – which is levitating the SPX/Dow.  And the best way to short the housing market is by shorting the homebuilders.   When the SPX eventually goes down “X,” the homebuilders go down 2-3X.

I have written a detailed article on the Pending Home Sales index, which you can read here:   Pending Home Sales Report Forecasts Further Gloom For Housing.  Perhaps the funniest part about this report was the NAR’s chief donkey, Larry Yun, attributing the decline in pending home sales to a “rising interest rate” environment.  Well, Larry, the actual market data shows that during August the rate on 30yr mortgages was at its lowest in a year and close to all-time lows.

The real culprit is the exit stage left of big investment buyers and small-time flippers and the continued fade of the first-time buyer segment. I’ve got bad news for Larry.  Mortgage purchase applications declined in three out of four reporting periods during the month of September.  On the assumption that flippers did not pick up their activity – probably a great assumption – September’s pending home sales report will be negative as well.

I just posted a new homebuilder short report which you can access here:   Homebuilder Short Reports.  On the assumption that some kind of miracle does not save the housing market, I expect that this latest idea will achieve a 70% ROR over the next 18-24 months.  This particular company is highly “leveraged” to the first-time buyer market and it employs highly questionable accounting techiniques as a means of managing its GAAP net income.