Tag Archives: Housing bubble

The Size Of The Financial Avalanche Coming Grows Larger

Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $50 in late June and Redfin (RDFN) at $28 in late September.  ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

“Party Like It’s 1999” (or 2008 or 1987 or 1929)

To paraphrase the highly regarded fund manager and notable bear, John Hussman, you can look like an idiot before a Bubble pops or after it’s popped.

I guess I’m squarely in the camp of looking like an idiot before the bubble pops. I might watch “The Big Short Again” for some “moral fortitude.” With history’s stamp of approval on my side, all I can do is shake my head and chuckle. As soon as the Dow crossed over 23,000 on Wednesday, the “experts” on bubblevision began speculating how long it would take for the Dow to hit 24k. I was actively trading and shorting dot.com stocks in late 1999 and the curent environment feels almost exactly like it felt then. Wake up everyday and wait for Maria Bartiromo to breath the name of a dot.com stock you were short and watch it spike up 10-20% on her signal. The Nasdaq ran from 2,966 to 4,698 – 1,700 pts or 58% – in 4 months. It was painful holding shorts but very rewarding after the brief period of “suffocation.”

It feels like the market could go into a final parabolic lift-off to its final peak before the inevitable. The non-commericial (i.e. retail) short-interest in the VIX – meaning retail investors are “selling” volatility – hit another all-time high this past week. This a massive and reckless bet against any possibility of any abrupt downside in the market. It reflects unbridled hubris. Don’t forget, smart money and banks are taking the other side of this bet.

To think that any Trump tax reform bill that might get passed will improve the fundamentals of the economy and lead to higher corporate earnings is absurd. The tax bill proposal is nothing more than a huge windfall for the wealthy (as in, 8-figure net worth and above) and Corporate America. The plan is, on balance neutral to negative for the average middle class household. Although it doubles the standard deduction, it eliminates the deduction for state and local taxes, which means you’ll lose the deduction for property taxes. It also will steer a large portion of middle class homeowners away from itemizing deductions, which means it will marginalize or eliminate the ability to use mortgage interest as a deduction. Corporations of course will benefit the most – as the tax rate would be lowered from 35% to 20% – because they throw the most money at Congress.

It’s estimated that the tax plan would cost the Government $6 trillion in revenues over the next 10 years. At $600 billion per year, this would have doubled the “official” spending deficit for FY 2017 (Note: if you include the debt issuance that was deferred until the debt limit ceiling was suspended – a little more than $300 billion – the amount debt that would have been issued by the Government in FY 2017 would have been about $1 trillion. This number is the actual spending deficit).

In short, even if some sort of “compromise” legislation is passed, the tax “reform” would do little more than shift trillions from revenue going to the Government to cash flow going into the pockets of Corporate America and the upper 1% (and really the upper 0.5%). That said, any notion that the stock market melt-up this past week is connected to the tax reform effort is idiotic. This is because it will add $100’s of billions per year in Government debt issuance requirements and will do little, if anything, to stimulate economic activity.

On the contrary, the stock market behavior is attributable to the last-gasp capitulation that characterized the coup de grace phase of any previous stock market bubble. This includes the re-surfacing of phrases like, “it’s different this time,” “it’s a new economic paradigm,” “stocks have reached a permanent plateau,” etc. CNBC even featured a graphic last week which showed Bitcoin as having a P/E ratio. Sheer madness.

It’s different this time? – As much as I hate to listen to radio ads when I’m driving (I listen to the local sports talk-radio programming and normally switch to music during the 5 min ad breaks), in the past several weeks I’ve been listening to the commercial breaks. The reason for this is that radio ads often reflect the current local trends in demand for services /products. Starting in late summer, frequent ad spots have been occupied by: 1) a service that offers IRS back-tax settlement services; 2) numerous mortgage brokers pitching “use your house as an ATM and take-out home equity loans to pay-down credit card debt and have money for the holidays;” 3) “make fast money” home-flipping seminars.

In terms of middle-class demographic trends, Colorado has always been regarded as a leading indicator for most of the country between the coasts. The IRS tax settlement service ads tell me that the middle class has run out of disposable income: can’t pay taxes owed, credit card debt is too high, and is worried about holidays. I’ve been discussing this development for quite some time. The tax thing is self-explanatory. There’s likely similar companies/law firms all over the country running ads pitching tax settlement services. Wage-earners will under-withhold their paycheck taxes to help cover current spending and hope that year-end bonuses, or whatever luck fate might have in store, will enable them to pay what they owe when they file.

The “use your house as an ATM” ad is disturbing. This was an idea originally proposed by Greenspan in 2002 and put aggressively into action from 2004 to 2008. In 2004 Greenspan advocated using adjustable rate mortgages. How did that end up? The reason it won’t go on for another four years is that households are stretched on their Debt-To-Income profile (pretax income to debt service ratio) relative to the 2004-2008 period. Household debt – auto/credit card/student loan + mortgage – already exceeds the 2008 peak. Back then, home values were rising right up until late 2007/early 2008. Currently, in most markets home prices are starting to drop (this was occurring by late summer, so it’s not just “seasonal,” which is an argument you might hear). I’m starting to get email notices of homes listed in every price segment that are dropping their offer price up to and over 10%. This includes apartments in the under $400k price-segment (according to the NAR, the average price of existing home sales declined 2.7% from August to September – more on existing home sales below).

As enough home sales are closed with price drops greater than 10%, the fun begins. As I’ve detailed in previous issues, an increasing percentage of buyers right now are flippers (those radio ads are occurring for a reason). Enough people have decided that they “don’t want to miss out” on the “easy money” being made flipping homes. Guess what? They’ve missed out. The majority of flippers who have purchased in the last 3-6 months that have not been listed or are listed but just sitting are soon going to be looking for buyer bids to sell into. The problems will start when the flippers who used debt to buy their “day-trade” discover that the current “bid side” for their home is below the amount of debt used to buy the house.

Just like upward momentum in stock and home prices induces daytraders and flippers respectively to chase prices up in anticipation that someone will readily be willing to pay them even more, falling prices in stocks and homes generates motivated selling and scares away buyers. With homes it’s slightly different. Falling stock prices tend to generate selling volume that “forces” the market lower quickly. With stocks, there will be short-sellers who provide some liquidity to sellers as the shorts cover on the way down.

Housing, on the other hand, goes from a “liquid market” in rising markets to an ‘illiquid market” in falling markets. A home is a “chunky, high-ticket” item that takes time to close. In falling markets, the value of a home declines measurably before the buyer closes. Because of this, buyers will disappear until the market appears to have stabilized. Unlike stocks, homes can’t be shorted, which means there are no buyers looking to take a profit on a bet the market would fall. Often price falls in a “step function.” By this I mean there will be price-gaps to downside in the market as buyer “bids” disappear completely (i.e. bid-side volume vanishes).

I’m seeing this dynamic in the over $1,000,000 market in Denver. I have friend who lives in a high-priced neighborhood in south Denver (Heritage Hills). He had his house on the market for close to a year and couldn’t move it at a price that was in-line with comps (he’s a licensed real estate agent). The problem is that homes were not selling in his ‘hood. I told him if he marked it down $100k he could probably move it. He said he would wait for the market to improve and took it off the market. That was in July. It’s too late. Homes over $1mm are being reduced in price in $100,000 “chunks” now. I’ve gotten several “price change alerts” for homes around Denver listed during the summer that are lowering their offer in $100k steps. Some of them have been lowered already 15-20% from their original listing price. It gets worse.

One of the Short Seller Journal subscribers who lives in the south Denver metro area sent me a note about a home he has been watching in Castle Rock, which is about 35 minutes south of downtown Denver in a very pretty area along the foothills. The area ranges from cookie cutter middle class neighborhoods to a high-end, exclusive country club community. It was one of the hottest bubble areas in the mid-2000s bubble. He showed me a home that was listed in May for $1.39 million. Since then it’s been taken down $400k in four price changes. The last price cut was $200k.

This is an example of extreme “step function” price drops. Maybe the house was over-priced to begin with, but not by nearly 30%. The original offer price has to be based loosely on comps or no listing broker would touch it. It’s on its fourth listing agent. Last summer (2016) it’s quite likely this house would have moved somewhere near the offer price. He also told me that he’s seeing more pre-foreclosure and foreclosure activity in the homes around $1,000,000 in that area. This is how it starts and I’m certain this is not the only area around the country where this is starting to occur.

The Big Short 2.0: The NAR Whiffed Badly This Month

Based on the National Association of Realtor’s “Seasonally Adjusted” Annualized Rate (SAAR) metric, home sales were said to have ticked up 0.7% in September from August. On a SAAR basis they declined 1.5% from September 2016.  In his customary effort to glaze the pig’s lips with lipstick, NAR chief “economist” and salesman, Larry Yun, asserted that sales would have been stronger but for the hurricanes that hit Florida and Texas.

This guy should do some better vetting of the data before he tries to spin a story. The Houston Association of Realtors was out a week earlier stating that Houston home sales were up 14% in September from August and up 4.2% from September 2016. Yun’s fairytale is a stunning contrast to what is being reported from Houston. But it illustrates the fact that the data on housing the NAR reports is highly suspect.

As I’ve been detailing for years, the NAR’s existing home sales report is highly manipulated and flawed.  It works well for the industry and the media in rising markets, but the real estate market has rolled over and is preparing to head south.  Likely rather quickly.  As it turns out, the September existing home sales report released Friday reinforces my view that the market is starting to topple over.  I go over the details in the next issue of the Short Seller’s Journal, with a couple examples which foreshadow a collapse in the over $1,000,000 price segment of the market.  This in turn will affect the entire market.  I always suspected that the “Big Short 2.0” would start at the high-end.  An example outside of Colorado can found here:  Greenwich Sales Plunge.

Four weeks ago I presented a housing-related stock as a short good idea.  The stock is down nearly 10% in four weeks.   How can this be?  Isn’t the housing market hot?  It will be going much lower.  This week I’ll be featuring a housing industry supplier stock that went parabolic and will soon go “cliff dive.”  If you want to find out more about this subscription service, click here:  Short Seller’s Journal info.

I love your Short Seller’s Journal. Keep up the great work – recent new subscriber

The Housing Market Has Stalled

The housing market headed for very “rough waters.” The title is from the National Association of Realtor’s Pending Home Sales report for August in reference to NAR chief “economist” Larry Yun’s commentary on the housing market. Pending homes sales in August, which are based on contracts signed, dropped 2.6% from August. They’re also 2.6% below a year ago August. These are SAAR numbers. The “not seasonally adjusted” numbers were worse, down nearly 4% from August and 3.1% lower than last August.

Once again Yun is blaming the problem on supply. I torpedoed that assertion with facts in last week’s Short Seller’s Journal.  Although, there is indeed a “supply” issue in one regard: there’s a shortage of end user buyers who are required to use, and qualify for the use of, the Government’s de facto subprime mortgage program (as I detailed last week). There’s also a shortage of existing home owners in the mid-price range who can afford to move-up. So yes, in that sense there’s a shortage – it’s just not in homes.

DR Horton (the largest homebuilder in the country) is carrying about the same amount of inventory now as it was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. The point here is that there are plenty of newly built homes available for purchase. Per the Census Bureau, the median sales price of a new home in August was $300k, while the average price was $368k. DH Horton is an averaged price homebuilder.

Per DH Horton’s inventory numbers, there is not a shortage of inventory around the average priced newly built home. Again, there’s a shortage buyers available who can qualify for the debt required to buy one of those homes. This is why the Government has significantly loosened mortgage standards every year since 2014 (see the graphic below). Up against the wall again, I don’t know if the Government will again further loosen the Fannie/Freddie mortgage requirements. If it does nothing, which would be the sensible decision, the housing market is going to sustain a rapid downward price “adjustment.”

Housing stocks are in a mini “melt-up” though it’s somewhat subdued relative to the melt-up in semiconductor stocks. This is despite the threat of rising interest rates and rapidly deteriorating demand-side fundamentals. This is the signal that the end is near for these stocks. Ironically, the University of Michigan consumer confidence survey for September released Friday showed that consumers who judge the current home-buying conditions as favorable plunged to a 5-yr low. This is notwithstanding the easiest mortgage approval standards in over two years:

The graphic above shows consumer perception of homebuying conditions on the left and the latest Fannie Mae lender survey on credit standards on the right. As you can see, the credit standards are the easiest in at least 2-years. Note:  The Fannie survey only dates back to Q3 2015. I would bet good money that the current credit conditions are the easiest since right before the previous housing bubble popped in 2008.

I’ve been discussing and detailing, the alleged “supply issue” affecting home sales is, in fact, a demand-driven issue. This graphic illustrates this:

The graph above is also from Fannie Mae’s latest housing market survey. As you can see, the demand for GSE (Fannie/Freddie/FHA) purchase mortgages has plunged since Q3 2016. The demand for non-GSE and Ginnie Mae purchase mortgages has also declined significantly since Q3 2016.

There’s an online MLS home-listing site called REColorado. I’m signed up to get listing and price-change alerts as they occur in several difference zip codes the represent the areas in metro-Denver that have been hottest. Colorado has experienced a massive inflow of people from all over country, especially California, which has made the Denver area one of the hottest housing markets since 2012, when the State fully legalized marijuana. Since mid-summer, I’ve been “price-change” alerts on homes over $700k on a daily basis. As I write this, I just received two more today. One of the homes started at $1.8 million in September and has taken the price down 11% over three price drops. The other house has an asking price of $779k but has been reduced more than 8% in four price reductions since June. If this is happening in metro-Denver, it’s happening in most formerly “hot” areas. Yes, there will be a few areas around the country that remain “hot” for awhile (like SoCal), but those areas will eventually suffer the most just like in 2008.

I want to reiterate that the housing market is a great short here. The only explanation for the move in the homebuilder stocks this past week is that it’s a momentum-driven technical run. The stocks I’ve been presenting in the last several issues will be lower this time next year. Probably a lot lower. Redfin (RDFN), the online real estate brokerage that I presented last week, closed Friday down $2.88 (10.3%) from the previous Friday. It’s going lower. It’s a good bet that this stock will be trading at or below $20 by Christmas. Zillow Group (ZG) is down 20% since a re-recommended shorting it in the June 25th SSJ issue at $50.69. I will say that I did not expect that to be close to ZG’s all-time high it was an obvious short to me at that point. Companies that earn commissions and fees directly from (RDFN) or related to (ZG) home sales volume will be the leading indicators.

The above analysis and commentary is from the latest issue of the Short Seller’s Journal.  You can out more about subscribing to this weekly investment newsletter here:  Short Seller’s Journal subscription info.  Despite the major indices hitting new all-time highs everyday now, there are many stocks that are declining.  The perfect example is Zillow Group, which I recommended shorting at $50 in June .  It is currently down 18% (an 18% gain if you are short, more if you bought the puts I recommended).  Subscribers also get 50% off the price of subscribing to the Mining Stock Journal.

The US Economy Is Failing – Paul Craig Roberts

IRD Note:    Along with the housing market, the entire economy is beginning to collapse. Unless the Fed implements another round of trillions in money printing, the laws of economics will take control of the system. With the housing market, the point of inflection downward began to occur in late spring/early summer. I have detailed this assertion with copious amounts of data and ways to profit from this insight in recent  Short Seller’s Journals.  Despite the melt-up in homebuilder stocks, one of my ideas from last week was down 10% through Friday.

—————

The commentary below is by Paul Craig Roberts:

Do the Wall Street Journal’s editorial page editors read their own newspaper?

The front page headline story for the Labor Day weekend was “Low Wage Growth Challenges Fed.” Despite an alleged 4.4% unemployment rate, which is full employment, there is no real growth in wages. The front page story pointed out correctly that an economy alleged to be expanding at full employment, but absent any wage growth or inflation, is “a puzzle that complicates Federal Reserve policy decisions.”

On the editorial page itself, under “letters to the editor,” Professor Tony Lima of California State University points out what I have stressed for years: “The labor-force participation rate remains at historic lows. Much of the decrease is in the 18-34 age group, while participation rates have increased for those 55 and older.” Professor Lima points out that more evidence that the American worker is not in good shape comes from the rising number of Americans who can only find part-time work, which leaves them with truncated incomes and no fringe benefits, such as healh care.

Positioned right next to this factual letter is the lead editorial written by someone who read neither the front page story or the professor’s letter. The lead editorial declares: “The biggest labor story this Labor Day is the trouble that employers are having finding workers across the country.” The Journal’s editorial page editors believe the solution to the alleged labor shortage is Senator Ron Johnson’s (R.Wis.) bill to permit the states to give 500,000 work visas to foreigners.

In my day as a Wall Street Journal editor and columnist, questions would have been asked that would have nixed the editorial. For example, how is there a labor shortage when there is no upward pressure on wages? In tight labor markets wages are bid up as employers compete for workers. For example, how is the labor market tight when the labor force participation rate is at historical lows. When jobs are available, the participation rate rises as people enter the work force to take the jobs.

I have reported on a number of occasions that according to Federal Reserve studies, more Americans in the 24-34 age group live at home with parents than independently, and that it is those 55 and older who are taking the part time jobs. Why is this? The answer is that part time jobs do not pay enough to support an independent existence, and the Federal Reserve’s decade long zero interest rate policy forces retirees to enter the work force as their retirement savings produce no income. It is not only the manufacturing jobs of the middle class blue collar workers that have been given to foreigners in order to cut labor costs and thus maximize payouts to executives and shareholders, but also tradable professional skill jobs such as software engineering, design, accounting, and IT—jobs that Americans expected to get in order to pay off their student loans.

The Wall Street Journal editorial asserts that the young are not in the work force because they are on drugs, or on disability, or because of their poor education. However, all over the country there are college graduates with good educations who cannot find jobs because the jobs have been offshored. To worsen the crisis, a Republican Senator from Wisconsin wants to bring in more foreigners on work permits to drive US wages down lower so that no American can survive on the wage, and the Wall Street Journal editorial page editors endorse this travesty!

The foreigners on work visas are paid one-third less than the going US wage. They live together in groups in cramped quarters. They have no employee rights. They are exploited in order to raise executive bonuses and shareholder capital gains. I have exposed this scheme at length in my book, The Failure of Laissez Faire Capitalism (Clarity Press, 2013).

When Trump said he was going to bring the jobs home, he resonated, but, of course, he will not be permitted to bring them home, any more than he has been permitted to normalize relations with Russia.

In America Government is not in the hands of its people. Government is in the hands of a ruling oligarchy. Oligarchic rule prevails regardless of electoral outcomes. The American people are entering a world of slavery more severe than anything that previously existed. Without jobs, dependent on their masters for trickle-down benefits that are always subject to being cut, and without voice or representation, Americans, except for the One Percent, are becoming the most enslaved people in history.

Americans carry on by accumulating debt and becoming debt slaves. Many can only make the minimum payment on their credit card and thus accumulate debt. The Federal Reserve’s policy has exploded the prices of financial assets. The result is that the bulk of the population lacks discretionary income, and those with financial assets are wealthy until values adjust to reality.

As an economist I cannot identify in history any economy whose affairs have been so badly managed and prospects so severely damaged as the economy of the United States of America. In the short/intermediate run policies that damage the prospects for the American work force benefit what is called the One Percent as jobs offshoring reduces corporate costs and financialization transfers remaining discretionary income in interest and fees to the financial sector. But as consumer discretionary incomes disappear and debt burdens rise, aggregate demand falters, and there is nothing left to drive the economy.

What we are witnessing in the United States is the first country to reverse the development process and to go backward by giving up industry, manufacturing, and tradable professional skill jobs. The labor force is becoming Third World with lowly paid domestic service jobs taking the place of high-productivity, high-value added jobs.

The initial response was to put wives and mothers into the work force, but now even many two-earner families experience stagnant or falling material living standards. New university graduates are faced with substantial debts without jobs capable of producing sufficient income to pay off the debts.

Now the US is on a course of travelling backward at a faster rate. Robots are to take over more and more jobs, displacing more people. Robots don’t buy houses, furniture, appliances, cars, clothes, food, entertainment, medical services, etc. Unless Robots pay payroll taxes, the financing for Social Security and Medicare will collapse. And it goes on down from there. Consumer spending simply dries up, so who purcheses the goods and services supplied by robots?

To find such important considerations absent in public debate suggests that the United States will continue on the country’s de-industrialization, de-manufacturing trajectory.

Peak Housing Bubble: 2008 Deja Vu All Over Again

Existing Home Sales were released Wednesday and the NAR’s seasonally adjusted annualized rate metric was down 1.7% from July. July was down 1.3% from June. The NAR’s SAAR metric is at its lowest rate since last August. Naturally the hurricane that hit Houston is being attributed as the primary culprit for the lower sales rate. Interestingly, the “not seasonally adjusted” monthly number for the South region was higher in August than in July. Moreover, I’m sure the NAR’s statistical “wizards” were told to “adjust” for Houston. So I’m not buying the excuse.

As for the NAR’s inventory narrative, that’s a bunch of horse hooey. Recall the chart I’ve posted a couple times in previous issues which shows that sales volume is inversely correlated with inventory – this is 17 years of data:

In other words, sales volume increases as inventory declines and sales volume declines as inventory rises. This is intuitive as prospective buyers will get desperate and rush to secure a purchase when inventory is low. Conversely,when a prospective buyer sees inventory climbing, the tendency will be to wait to see if prices come down.

It’s disingenuous for the NAR to claim that low inventory is affecting sales. Based on its own calculus, there’s 4.2 months of supply right now. This is up from 3.8 months in January. In fact, from December through March, months supply was said to have been well under 4 months. And yet, the monthly SAAR sales for each month December through March averaged 4.5% above the level just reported for August. In other words, the excuse put forth by the NAR’s chief “economist” is undermined by the NAR’s own numbers. However, given that the inventory expressed as “months supply” has been rising since April, it should be no surprise that sales are declining. This is exactly what would have been predicted by the 17 years of data in the sales vs inventory chart above.

The other statistic that undermines the “low inventory is affecting sales” propaganda is housing starts. Housing starts peaked in November 2016 and have been in a downtrend since then. Robert Toll (Toll Brothers – TOL) stated directly in his earnings commentary a couple weeks ago that “supply is not a problem.” Furthermore, DR Horton – the largest homebuilder in the country) is carrying about the same amount of inventory now as was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. Starting in 2008, DHI began writing down its inventory in multi-billion dollar chunks. Sorry Larry (NAR chief “economist” aka “salesman”), there are plenty of newly built homes available for purchase.

The Fannie and Freddie 3% down payment, reduced mortgage insurance fee program that has been in effect since January 2015 has “sucked” in most of the first-time buyers who can qualify for a mortgage under those sub-prime quality terms. If the housing market cheerleaders stated that “there is a shortage of homes for which subprime buyers can qualify to buy,” that’s an entirely different argument.

Housing price affordability has hit an all-time low. Again, this is because of the rampant home price inflation generated by the Fed’s monetary policy and the Government’s mortgage programs. The Government up to this point has done everything except subsidize down payments in order to give subprime quality borrowers the ability to take down a mortgage for which they can make (barely) the monthly mortgage payment. At this stage, anyone with a sub-620 FICO score who is unable to make a 3% down payment and who does not generate enough income to qualify under the 50% DTI parameter should not buy a home. They will default anyway and the taxpayer will be on the hook. As it is now, the Government’s de facto sub-prime mortgage programs are going to end badly.

Speaking of the 50% DTI, that is one of the qualification parameters “loosened” up by Fannie Mae. A 50% DTI means pre-tax income as a percentage of monthly debt payments. Someone with a 50% DTI is thereby using close to 70% or more of their after-tax cash flow to service debt. This is really not much different from the economics of the “exotic” mortgages underwritten in the last housing bubble. As the economy worsens, there will be sudden wave of first-time buyer Fannie Mae and Freddie Mac mortgage defaults. I would bet that day of reckoning is not too far off in the future.

The Fed has fueled the greatest housing price inflation in history. In may cities, housing prices have gone parabolic. But to make matters worse, this is not being fueled by demand which exceeds supply.

After all, we know that homebuilders have been cutting back on new home starts for several months now. Price inflation is the predominant characteristic of this housing bubble. The price rise since 2012 has been a function of the Fed’s enormous monetary stimulus and not supply/demand-driven transactions.

The effect of the Fed’s money printing and the Government’s mortgage guarantee programs has been to fill the “void” left by the demise of the private-issuer subprime mortgages in the mid-2000’s housing bubble. The FHA has been underwriting 3.5% down payment mortgages since 2008. In 2008, the FHA’s share of the mortgage market was 2%. Today it’s about 20%. Fannie Mae and Freddie Mac allow 3% down payment mortgages for people with credit scores as low as 620. 620 is considered sub-prime. On a case-by-case basis, they’ll approve mortgage applications with sub-620 credit scores. Oh, and about that 3% down payment. The Government will allow “sweat” equity as part of the down payment from “moderate to low income” borrowers. Moreover, the cash portion of the down payment can come from gifts, grants or “community seconds.” A “community second” is a subordinated (second-lien) mortgage that is issued to the buyer to use as a source of cash for the down payment.

Again, I want to emphasize this point because it’s a fact that you’ll never hear discussed by the mainstream media:  The Government mortgage programs resemble and have replaced the reckless “exotic” mortgage programs of the mid-2000’s housing bubble.

To compound the problem, most big cities are being hit with an avalanche of new apartment buildings.  In Denver, the newer “seasoned” buildings are loading up front-end incentives to compete for tenants.  There’s another tidal wave of new inventory that will hit the market over the next six months.  This scene is being replayed in all of the traditional bubble cities.   As supply drives down the cost of rent, the millennials who can barely qualify for a mortgage that sucks up more than 50% of their pre-tax income will revert back to renting .  This will in turn drive down the price of homes.

Flippers who are leveraging up to pay top-dollar will get stuck with their attempted housing “day-trade.”  Studies have shown that it was flippers who were unable to unload their homes who triggered the 2008 collapse, as they “jingle-mailed” the keys back to the greedy bankers who funded the “margin debt” for their failed trade.

It may not look exactly the same as late 2007 right now.   But there’s no question that it will be deja vu all over again by this time next year…

The above commentary and analysis is directly from last week’s Short Seller’s Journal. In the latest issue I presented three ways to take advantage of the coming collapse in the housing and mortgage market, one of which is already down 10%.  If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S.   – James

Peak Housing Bubble: The Big Short Is Back

Wash, rinse, repeat. The American public never gets tired of the destructive abuse it suffers from Wall St. The deep sub-prime mortgage market is roaring back and, with it, the nuclear bomb-laden derivatives that triggered round one of The Big Short de facto financial system collapse:

It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system. But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages.

Citigroup is leading the charge this time around, instead of Bear Stearns and Lehman:   Citi Revives The Trade That Blew Up The System In 2008.   Oh, and do not be mistaken, the financial “safeguards” legislated by Congress and widely heralded by Obama and Elizabeth Warren are completely useless.

The commentary below is a guest post from a reader and Short Seller’s Journal subscriber who is a 25-year subprime lending professional. Below, he shares his wisdom of experience in explaining why the latest deep subprime mortgage products hitting the market is the definitive “bell” that rings when a market bubble is about to pop.

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Before the Lehman crash I was part of the brokering and banking system that built billion dollar pools of commercial cow manure loans we farmed out to Lehman Bros. JPM, CIT, Zion’s Bank, Bank of the West and others did the same.

Lehman was the poster child. They stretched the envelope of mortgage insanity. Their failure was the instant death knell of that terrible scam. Every originator of these pools and brokering conduits failed. Some disappeared in 24 hours. But like the undead, these NINJA warriors are back from the grave just in time to profit from the biggest housing bubble in human history.

While “The Big Short” bubble/bust wiped out the industry, the overseers walked away collectively with billions and no one went to jail other than a few scape-goated underlings. But like the survivors of a 7 year mortgage apocalypse cycle of feast or famine, those who made it are back are more corrupt than ever.

No one learns from these mistakes. Bankers and brokers are like “Chucky” in the “Child’s Play” horror movies. It wasn’t more than a few days after Lehman imploded that the entire fraudulent subprime commercial and residential loan edifice came down. The commercial bank loan system shut down for nearly a year. Banks failed by the hundreds. Thousands more were propped up with TARP and HARP.

What got me going is that the latest product being pimped by Citadel Capital reminds me of a classic bucket shop operation with all the worst elements of gangster loan sharks, knee breakers and “vig” of 5% a week. Perhaps one of the most insidious aspects of the subprime business being originated by Citadel is the manner in which they get around the legislation implemented under Obama via Dodd-Frank that was supposed to protect the public from predatory lending and Wall Street fraud. Citadel specifically has a lending program that is called “Outside Dodd Frank.”

Citadel really caught my eye. There’s a wealth of information on Citadel Servicing Corporation, some from their web page and some from the ‘net itself. While the mainstream media heralds the merits of the Dodd Frank legislation, there are large loopholes in the mortgage broker/banker regulations that circumvent the alleged “safeguards.”

This mortgage origination program, which is disguised as a “business loan program” was sent to me by Citadel Capital, a relatively new and rapidly growing residential and commercial lender. Citadel Capital is part of the Citadel LLC hedge fund empire.

As a commercial loan broker for the last 25 years, I can tell by the rates being charged for these loans that the “professionals” at Citadel hold their nose while they package the junk paper and send them as “mortgage pools” to Wall Street. The Citadel junk is much like the old sub prime NINJA crap that filled portfolios from coast to coast.

Citadel doesn’t want these loans to ripen and turn sour, defaulting while they still sit on Citadel’s balance sheet waiting to be shipped to Wall Street’s financial sausage factory. It’s likely they sit on Citadel’s shelf for no more than a month or so and, like smuggled heroin, peddled to the next middle man in the chain for cutting, diluting and selling to the end user.

Most companies like Citadel borrow on wholesale lines capital provided by yield-starved pension funds. These funds are on the hook for as long as it takes Citadel to churn them like rancid butter, as they aggregate a loan pool big enough to interest Wall Street into securitizing the pooled loans into the infamous CDO’s (collateralized debt obligations). These are the financial nuclear weapons that blew up Wall Street in 2008.

The big fish,TBTF banks bailed out by Obama and Bernanke, take the loan pools and repackage them into risk-return-tiered mortgage-backed trusts. They then piece out the tranches to their clients – yield-starved institutional investors and greedy high net worth sitting ducks. Some of the tranches of these financial sausages are given ratings from Moody’s and S&P which are significantly higher than they merit in return for a small part of the “vig” involved. You are naive if you thought the post-2008 financial “reform” eliminated this important step in the entire process.

The money involved is enormous. The wholesalers – entities like banks and investment funds who provide “warehouse” lines of credit used to fund the loans – get a 3-4% spread as their fee on funds loaned.  When funded, these loans are priced to give the aggregator such as Citadel premiums of 5-9% or more, depending on the various ingredients stirred in to “juice” the yield. These premiums are apportioned to the various parties involved in funding the mortgages and bringing borrowers to the table. The mortgage brokers offer up their clients like lambs to the slaughter, concerned with one thing, collecting the points paid by the borrower plus handsome rebates from Citadel where allowed by state or federal statute.

There’s even bigger “vig” for bringing the borrowers to the party. Citadel brokers and outside mortgage brokers can make up to 8-9% on the amount borrowed depending on both the risk-profile of the borrower and the willingness of the borrower to accept various “bells and whistles” which ultimately increase the cost of the loan. But these hidden fees are not paid up-front by the borrower. Instead, they’re built into the high rate charged to the borrower. The Citadel “group” gets paid when the loan is part of a pool that is marked up in value and sold to Wall Street as material for its financial sausage.

Speaking of those “bells and whistles,” which substantially increase the cost of the mortgage to the borrower, and having seen how these loans were crafted in the past, I know that any one of these “innocuous” terms written into the fine print can increase the cost to the borrower by 1 percent or more. To make matters worse, these are the terms that make it nearly impossible for the borrower to make payments for more than a short period of time.

The borrowers stagger into loan offices like Dead Men Zombies with 500 FICOs and nary a pulse. Many are remnants of the last sub prime crash, walking wounded waiting to be fleeced again. They provide some bank statements, often photo-shopped by the borrower or the broker. They offer up hand-me-down, shop worn camp fire stories of woe that get better with each telling. The greed-driven broker feigns a look of sorrow and understanding. If I’ve heard 1 story I’ve heard 100.

Even if they’ve defaulted on the last 3 loans, filed Chapter 11 or 22 and stiffed every creditor in town, somehow they’ll convince the underwriter they’ve had their St Francis of Assisi debt moment and will never be late again. Listen up. There’s a reason they have a 500 FICO. They’re deadbeats with a real estate deal to lend on. They’ll willingly agree to the high-priced terms in order to get back in the game of buying and flipping.

The end investor buys this tranche and yet still might carve it up like a hog, selling some slices here and there; repriced and re-rated by the rating agencies to cover the stink. They might keep the best parts for themselves while dumping the low cuts and offal to a new tier of overseas zombie, yield-starved investors.

The science behind these mortgage conveyor belts was perfected 35 years ago. The bankers pulling the levers will never be prosecuted; just fines; pittance by the DOJ. The brokers will never look back. They’re unlikely to be prosecuted except for the rare ones; those who get caught because they stayed in the game too long or didn’t cover their tracks.

IRD’s note:  Citadel is not the only purveyor of these financial time-bombs. There’s several “bucket shop” deep sub-prime mortgage generators springing to life across the country. As an example, there’s a company called SCL Mortgage (“SCL” stands for “Special Circumstances Lending”) based out of Castle Rock, Colorado.  Castle Rock is a “poster child” city for the previous and current housing bubble.  The Company was founded and is led by a one of  the deep subprime “NINJA warriors” of the previous  “Big Short” era,  as are several of his employees.

New Home Sale Reporting Borders On Fake News

Headline monthly reporting of New Home Sales remained of no substance, short term, as seen most frequently here with massive, unstable and continuously shifting revisions to recent history, along with statistically – insignificant monthly and annual changes that just as easily could be a gain or a loss.  – John Williams, Shadow Government Statistics

If anyone has the credibility and knowledge to excoriate the Government’s new home sales reporting, it’s John Williams.  The Census Bureau’s data collection has been marred historically with scandals and severe unreliability.  The reporting for new home sales is a great example.

New home sales represent about 10% of total home sales – i.e. the National Association of Realtors has about 9-times more homes for which to account than the Government.  And yet, the monthly reporting of new home sales has considerably more variability and less statistical reliability.  It is subject to  much greater revisions than existing home sales. How is this even possible considering the task of tabulating new homes sold is far easier than counting existing home sales?

Today’s report is a perfect example.  The Census Bureau reports that new home sales increased 2.9% over April. Yet, at the 90% level of confidence, new home sales might have been anywhere from down 10% to up 15%.   Care to place a wager on real number considering that spread?   April’s number was revised upward by 24k, on a SAAR basis.

Speaking of the SAAR calculation, it’s amusing to look at what that can do to the number. The seasonally adjusted annualized rate number takes a statistical sample, which in and of itself is highly unreliable, and puts it through the Government’s X-13ARIMA-SEATS statistical sausage grinder.  Then it takes the output and converts it into an annualized rate metric. Each step of the way errors in the data collection sample are multiplied.

I’ve never understood why the housing industry doesn’t just work on creating reliable monthly data samples that can be used to estimate sales for a given month and then simply compare the sales to the same month the previous year. There is no need to manufacture seasonal adjustments because the year over year monthly comparison is cleansed of any possibly unique seasonality for a specific month.  Go figure…

To make matters worse, new home sales are based on contracts signed.  Often a down payment, and almost always financing, are not yet in place.  The contract cancellation percentage rate for new homes typically runs in the mid-to-high teens. By the way the Census Bureau does not incorporate cancellations into its data or its historical revisions.

To demonstrate how the seasonal adjustments magically transform monthly data into many more thousands of annualized rate sales, consider this:  the not seasonally adjusted number – which is presented at the bottom of the CB’s report and never discussed by the media or Wall Street, is 58,000.  In increase of one thousand homes over April’s not adjusted number.  And yet, the reported headline fake news number – the SAAR for May – wants us to believe that 610k homes were sold on an annualized rate basis, an increase of 17k SAAR over April.  It’s nothing short of idiotic, especially considering that the reported average sales price was 10% higher in May vs. April.  You can peruse the report here:  May New Home “Sales.”

One last point, if today’s reported number is even remotely correct, how come homebuilders have been cutting back on housing starts for the last 3 months?  The last time starts declined three consecutive months was late 2008.  In short, the new home sales report for May is, in all probability, borderline fake news.  At the very least, it’s yet another form of Government propaganda aimed at creating the illusion that the economy is stronger than reality.

The next issue of the Short Seller’s Journal – published Sunday evening – will focus on the housing market, which is getting ready to head south – possibly at a shocking rate.  Unfortunately, lenders, homebuyers, and the Government failed to learn from the previous housing bubble and now all the attributes of the previous housing bubble top are emerging. I will be reviewing the market in-depth and presenting some ideas to take advantage of historically overvalued homebuilder stocks.

The stock I featured in early April is down 13.2% through today despite a 6.5% rise in the Dow Jones Home Construction index during the same time-period. This particular company will eventually choke to death on debt.  The Short Seller’s Journal is a unique subscription and you can learn more about the Short Seller’s Journal here:  LINK

The Government Is Desperate To Re-Stimulate Housing Sales

The Fed printed $2.5 trillion to prop up the mortgage market and the Government “refurbished” all of the mortgage programs it sponsors (Fannie Mae, Freddie Mac, FHA, VHA, USDA) in a way that positioned the Government/taxpayer as the new subprime lender of choice.  The two programs combined inflated a new housing bubble – one that ended up fueling housing price inflation  more than sales volume.   The FHA program was the first program to replace the collapsed subprime mortgage lenders of the mid-2000’s with a 3.5% down payment program. It’s market share of mortgage underwriting rocketed from 2% in 2008 to around 20% currently.

As home sales began to falter in mid-2014, the Government rolled out a revision to the Fannie and Freddie programs in early 2015 that reduced the down payment requirement from 5% to 3% and reduced the monthly cost of mortgage insurance.  The VHA and, believe it or not, the USDA (U.S. Dept of Agriculture) programs provide low interest rate mortgages with zero down payment.

Fannie and Freddie permit the borrower to “borrow” the down payment or receive down payment assistance from a home seller willing make price/fee concessions in an amount up to the 3% down payment.  In other words, under FNM/FRE, a homebuyer can close a conventional FNM/FRE mortgage with zero down payment.   These alterations to the taxpayer guaranteed mortgage programs provided another short-term bounce in home sales volume and sent home prices soaring.

The housing market is headed south again.  Just in time, the Government is making it even easier for a potential buyer to load up more debt to leverage into the American dream. Fannie Mae is raising the debt-to-income ratio on its 3% down payment product from 43% to 50%.  DTI is the total household monthly debt payments divided by pre-tax income. While the credit standards are not quite as insane as during the last housing bubble, the current mortgage underwriting standards facilitated by the Government do not allow any cushion for household financial instability. This is especially true considering more than 50% of all households can’t write a $500 check to cover an emergency.

The latest iteration from the Government  reeks of desperation.  But wait, it gets even better. Some mortgage companies are now offering a 1% down payment mortgage that includes a 2% “gift” from the mortgage company in order to conform to the 3% FNM/FRE underwriting convention. The mortgage lender pays the 2% portion of the down payment.

However, this is not a free lunch “gift.” The mortgage lender assesses a higher rate of interest to the borrower than would be otherwise available from a standard FNM/FRE 3% down-payment mortgage. The mortgage lender, as the servicer of the mortgage, keeps the difference between the interest rate on the mortgage paid by the borrower and the amount of interest payment “passed-thru” to FNM or FRE. Over the life of the mortgage, assuming the borrower does not default, the mortgage company makes substantially more than was “gifted” to the borrower.

If a homebuyer does not have enough capital to make a 3% down payment, the odds are that the buyer also does not have the financial strength to maintain the cost of home ownership. Home-buyers who are “gifted” 2% of their down-payment do not need down-payment assistance, they need earning assistance.

This is going to end badly, especially for the taxpayer.  Obama promised after his mult-trillion dollar Wall Street bailout that the Government would not bail out the banks again. This “promise” guarantees that it will happen again.  Only this time the source of financial nuclear melt-down will be many:  mortgages, auto loans, unsecured household debt (credit cards) and student loans.   Oh ya, then there’s the derivatives. The sell-off in the banking sector since March 1st reflects the market’s awareness of the rising degree of risk lurking in the financial system from an orgy of reckless debt creation.

I don’t know when the this giant Ponzi bubble will blow, no one does, I just know that it will be worse than 2008 when it does blow.  The balloon latex is stretched so tight at this point that any systemic “vibration” not anticipated by the Fed could impale the thing.

The above commentary was partially excerpted from IRD’s latest issue of the Short Seller’s Journal.  Two financial sector stocks and one auto sector stock, all three of which have been falling and could easily get cut in half from their current level by year-end with or without a market “accident” were presented.  To find about more, click here:  SSJ Subscriber Information. 

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S – James

 

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.