Tag Archives: mortgage rates

WTF Just Happened? Gold, The Dollar And Interest Rates

What’s going on with gold, the dollar and interest rates – especially gold?  All of the variables that fundamentally support much higher gold prices are lined up perfectly.  Why isn’t gold moving higher?  The popular narrative in the mainstream financial media would leave one to believe that the dollar is soaring.  Eric and Dave put a big dent in that notion.  Additionally, in a long-term historical context, the recent rise in interest rates is tiny, yet marginally higher interest are already wreaking havoc on the economy (retail, auto and home sales).   What’s going to happen to the economy when the 10-yr Treasury hits 4%, which is still well below its long-run historical norm? (click on image to enlarge)

Eric Dubin and Dave Kranzler dig into these topics in the next episode of WTF Just Happened (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.  I recommended Almadex Minerals at 28 cents in April 2016 – it closed Friday at $1.13.  I recommended shorting Hovnanian at $2.88 in January  – it closed at $1.89 on Friday and has been as low as $1.70.

Sparks Fly Toward The Debt Powder Keg

The stock market has gone 74 days without making a new high but that hasn’t stopped the bulls from boasting about how it is up or flat six days in a row. I still say to sell into strength – David Rosenberg, Gluskin-Sheff

The narrative that the economy continues to improve is a myth, if not intentional mendacious propaganda. The economy can’t possibly improve with the average household living from paycheck to paycheck while trying to service hopeless levels of debt. In fact, the economy will continue to deteriorate from the perspective of every household below the top 1% in terms of income and wealth.

Theoretically, the Trump tax cuts will add about $90 per month of extra after-tax income for the average household. However, the average price of gasoline has risen close to 40% over the last year (it cost me $45 to fill my tank last week vs about $32 a year ago) For most households, the tax cut “windfall” will be largely absorbed by the increasing cost to fill the gas tank, which is going to continue rising. The highly promoted economic boost from the tax cuts will, instead, end up as a transfer payment to oil companies.

The Fed reported consumer credit for March last week. Consumer credit is primarily credit card, auto and student loan debt. The 3.6% SAAR (Seasonally Adjusted Annualized Rate) rate of increase over February was the slowest growth rate in consumer debt since September. Credit card debt outstanding actually dropped 3% (SAAR). But the 6% growth in non-revolving debt – auto/student loans – rose 6% (SAAR). Given the double-digit increase in truck sales in March, which offset the double digit decline in sedan sales, it’s safe to speculate that the increase in consumer credit during March was primarily loans to “buy” trucks/SUVs.

Remember, the average light truck/SUV sales ticket is about $13k more than for a sedan, which means that the average size of auto loans in March increased significantly during March. This is a horrifying thought in my opinion. Here’s why (original chart source was Wolfstreet.com):

As you can see, the rate of subprime 60-day-plus delinquencies is nearly 6%, which is substantially higher than during the peak financial crisis years. Why is this not directly affecting the system yet? It is but we’re not seeing it because the banks are still sitting on unused “excess reserves” – pain killers – that were given to them by the Fed’s QE program. The excess reserves act to “buffer” the banks from debt defaults, which in turn enables the banks to defer taking these auto loans into foreclosure and writing them off. But this will only serve to defer the inevitable:  debt defaults in quantities that will far exceed the amount of debt that blew up in the 2008 financial crisis.  Bank excess reserves are down 13% since August 2017.

I knew at the time that the Fed’s QE program was a part of the Fed’s strategy to build a “cushion” into bank balance sheets for the next time around. The only problem is that the size of the debt bomb has grown disproportionately to the size of the “cushion” and it’s only a matter of time before debt defaults blow a big hole in bank balance sheets.

Here’s the other problem with the statistic above. The regulators, along with FICO, lowered the bar on differentiating between prime and subprime. Despite the supposed effort to tighten lending standards since 2008, it’s just as easy to get a loan now as it was in 2007 and the variables that differentiate sub-prime from prime have blurred. I witnessed this first-hand when I accompanied a friend to buy a near-new car from a major Audi dealer in Denver. Based on monthly income, I advised him to buy a less expensive car. But Wells Fargo was more than happy to make the loan with very little money down relative to the cost of the car. No proof of income disclosure was necessary despite being self-employed. The friend’s credit rating is a questionable mid-600’s

This is the type of loan transaction that occurs 1000’s of times each day at car dealers across the country. If we had gone to one of the seedy “finance any credit” used car dealers, getting the loan would have been even easier because those car brokers also use credit unions and other non-bank private capital “pools” like Credit Acceptance Corporation (CACC) and Exeter Finance (private).

Student loans are not worth discussing because no one else does. Someone with a student loan outstanding can easily put the loan into “deferment” or “forbearance,” which makes it difficult to assess the true delinquency/default rate on the $1.53 trillion amount outstanding (as of the end of March). However, I have seen estimates that the real rate of serious delinquency is more like 40%. Most borrowers who defer or request forbearance do so because they can’t make current payments. Again, this is one of the bigger “white elephants” that is visible but not discussed (the $21+ trillion of Treasury debt is another white elephant).

The debt bubble and implosion will push homebuilder stocks off the cliff.   Several of my subscribers plus myself are raking in money shorting and buying puts on homebuilders stocks.  I took 50% profits on the puts I bought late last week.

The commentary above is an excerpt from last Sunday’s Short Seller’s Journal. My Short Seller’s Journal is a unique newsletter that presents the alternative to the “bull” case. It also presents short ideas, along with put strategies, every week. You can learn more about this newsletter here:  Short Seller’s Journal information.

 

Subprime Mortgages: The Dog Returns To Its Vomit

Other people’s money is always more fun to play with recklessly than your own.  As such there’s been a quiet escalation in number of  private capital pools offering mortgage (and auto) financing to subprime quality borrowers.  “Special Circumstance Lending” is one such lender in Denver.  It constantly runs ads on Denver radio.

The proprietor of Special Circumstance Lending was an aggressive participant in the junk mortgage underwriting business and dumped more than his fair share of subprime crap into the Wall Street mortgage securitization scheme that led to “The Big Short.” SCL doesn’t need to see your tax returns.  It will give you a mortgage based on bank account statements.

The big Wall Street banks appear to have retreated from risky mortgage lending.  But have they? Though new regulations are intended to limit the amount risk the big banks take underwriting mortgages , the banks instead extend large lines of credit to private “non-bank” mortgage lenders, like Exeter Finance.  The average credit score of Exeter underwritten paper is 570.   If Exeter doesn’t get repaid, the big banks extending the funds to underwrite that garbage won’t get repaid.

The Government, via Fannie Mae and  Freddie Mac, has been underwriting de-facto  subprime mortgages – though they are still labeled “prime” for securitization purposes – for a couple of years.  Let’s face it, a 3% down payment mortgage – where the 3% does not have to come from the pocket of the homebuyer – with a 50% DTI (50% of pre-tax monthly income is used to service debt) is not a prime-grade piece of paper. I don’t care what the credit score is attached to that underwriting.

But Freddie Mac is taking it one step further down the sewer. A Short Seller’s Journal subscriber who is involved with an investment fund that invests in difficult financings sent me the flyer he received for the new Freddie Mac dog vomit mortgage:  “I occasionally process residential mortgages, so I stay on top of the underwriting guidelines…As of July 29, you can buy a single family / condo (there has to be a first time homebuyer on the deed), with ZERO DOWN AND A 620 CREDIT SCORE, WITH NO INCOME RESTRICTIONS. I had a stroke when I read that!”

There is no minimum borrower contribution from borrower personal funds.  Furthermore, borrowers who put down 5% do not have to have a credit score.

The mortgages now offered by the Federal Government are beginning to look and smell like the same sub-prime sewage that was proliferated by Countrywide, Wash Mutual, etc in the mid-2000’s.  True, as of yet we have not seen a widespread issuance of the adjustable-rate ticking time bombs that triggered the financial crisis. But the U.S. Government, using your taxpayer dollars, has become the new subprime lender of first resort for first time homebuyers who have little financial capability of supporting the cost of home ownership for an extended period of time.

Like the dog returning to its vomit, the U.S. financial system has returned to the business of underwriting the next financial crisis.   Only this time around the Federal Government is providing a large share of the “rope” with which new homebuyers will eventually hang themselves.  The financial explosion that is going occur will be worse than 2008 because the average household has significantly more debt relative to income now, with more than 75% of all households living from paycheck to paycheck.  One small hiccup in the economy will trigger an avalanche of debt defaults.

Despite what seems like a strong housing market and buoyant stock market, the XHB homebuilder ETF is down 15.4% since mid-January. Many individual homebuilder stocks are down a lot more. My subscribers and I are making a small fortune shorting and trading puts on homebuilder stocks.  You can learn more about my subscription newsletter here:  Short Seller’s Journal information

 

Homebuilder Stocks Are In A “Bear Market”

I strongly believe that labeling the condition of the stock market based on arbitrary “percentage changes” up or down is absurd.  But then again most attributes of the current stock market are sublimely ridiculous, if not outright Orwellian.

But, what the heck. If down 20% is how you want to define a “bear market,” then a portfolio of Lennar (LEN, down 24%), Beazer (BZH, down 24%) and KB Homes (KBH, down 22%) are in definitive bear markets and heading lower, as are several other homebuilder stocks. This is a fact that intentionally goes unreported by Wall Street and Wall Street’s hand-puppet, the mainstream financial media (CNBC, Fox Biz, Bloomberg, Wall St Journal, Marketwatch, etc).

Homebuilders maliciously exploit a GAAP loophole that enables them to remove “interest expense” from the SEC-filed income statement. This artificially boosts reported GAAP and non-GAAP net income/earnings per share. I review this using Beazer as an example in the last issue of the Short Seller’s Journal.

The nature of the “bull market” in housing is widely misunderstood. As such, the easiest area of the market to make money shorting stocks is the homebuilding sector. I can say with certainty that 80% of the money I’m making shorting stocks is with homebuilder puts. It’s a boring sector but the percentages moves in these stocks makes it easy to “scalp” profits and to set-up low risk, highly profitable long term short positions.

Right now homebuilders are behaving like an ATM machine for short-sellers.

The Short Seller’s Journal is a unique weekly newsletter that provides truth-seeking insight on the economy and presents ideas for making money shorting stocks (including put option and capital management strategies). Learn how to use the homebuilders as your own ATM here: Short Seller’s Journal.

The Fed Successfully Destroyed The U.S. Housing Market

What concerns me is when people put their hard-earned money into housing or any other supposed store of value thinking that the sky is the limit. We are living in an age of epic distortions, misinformation and outright fraud. – Aaron Layman, Dallas-based Realtor, member of the Dallas and Houston MLS boards and a housing market analyst

The propaganda about a hot economy, “overheated” housing market and tight labor market is just one of several Big Lies being promoted by politicians and business leaders. The article below references a comment made by a money manager about the housing market “overheating.” But the housing market isn’t overheating. What’s overheating is the amount of “conforming” mortgage debt underwritten by the Federal Government on behalf of taxpayer. I’ll have more to say about this tomorrow.

The transformation of Fannie Mae, Freddie Mac, the FHA and the VHA into the new subprime debt provider has caused a shortage of homes under $500k, or under $600k in “high price” zones. But there’s an oversupply of homes north of $700k in most areas (the Silicon Valley area notwithstanding). But more on this tomorrow.

A colleague and email acquaintance, Aaron Layman, is a realtor in Houston who has been uniquely outspoken about the degree to which the current housing market is unhealthy and dysfunctional. I say “uniquely” because 99.9% of all realtors would sell a roach motel trap to cockroaches if they knew that they could get the cockroach qualified for a Taxpayer-backed mortgage to make that particular purchase (“hey man, this is a good value and prices are only going higher”).

Aaron has written a blog post which details the manner in which the Fed has destroyed the housing market and economy:

If you are out shopping for a home during this summer selling season and you are having a difficult time finding a good property at a reasonable price, be sure to thank the folks at the Fed for their fine work. Destroying a market takes some effort, particularly if you account for all of the PR necessary to cover your tracks. The Federal Reserve and their army of economists have created another fine mess in the U.S. housing market, destroying real price discovery and distorting the real value of a home which is end-user shelter.

Please use this link to read the entire essay – it’s worth your time:  The Fed Has Destroyed The Housing Market

Auto Sales Forecast To Tank In April

JD Powers and LMC Automotive are projecting auto sales to drop 8% in April from a year-ago April:

For much of the past two years, the discounts offered by automakers have remained at levels that industry analysts say are unsustainable and unhealthy in the long term…Sales are expected to drop further in 2018 as interest rates rise and more late-model used cars return to dealer lots to compete with new ones. – April Auto Sales Forecast

General Motors reported lousy Q1 numbers this morning. Revenues dropped 3.2% year over year in Q1. Revenues would have been worse but GM joined the rest of the country and extended financing to future deadbeats who took out loans greater than their annual pre-tax income in order to buy a pick-up truck. In other words, GM’s financing unit generated 25% growth in revenues, which cushioned drop in GM’s automotive revenues. Operating income fell off a cliff, plunging nearly 80% vs. Q1. Because of GAAP manipulations, EBIT was down only 55% from Q1 2017.

BUT, GM was credited with a headline “beat” of the Street’s earnings estimates. Only in America can a company’s operating numbers go down the drain and yet still be credited with a headline GAAP-manipulated net income “beat.” I find much humor in this absurdity. Others might find it, upon close examination, to be pathetic or even tragic. Given the forecast for April automotive sales, at least now we know GM announced earlier this month why it will begin to report auto sales on a quarterly basis instead of monthly.

The economy is much weaker than the narrative promoted aggressively by Wall Street, DC and the financial media. This tweet from @RudyHavenstein captures perfectly the divergence between moronic mainstream financial media and Main Street reality. We’re bombarded daily with propaganda about the healthy economy. Yet plenty of statistics show that the average household in this country is struggling under a mountain of debt and is living paycheck to paycheck.

This mostly explains the why credit card debt hits a new record high every month now. The average household is using revolving credit to help make ends meet. The only problem is that, in aggregate, the credit debt is not getting paid down. Rather, it’s increasing by the day. To compound the problem, credit card issuers are aggressive about jacking-up rates when the Fed funds rate is rising. I have a friend who has a 670 FICO score and recently used a loan to buy a car. The interest rate on the loan is 8%. This means that credit cards in general are charging rates in the mid-to-high teens to users with a sub-720 credit score. The outstanding balance will double in 5 years for a card-user who only pays the minimum amount each month on a card with a 15% interest rate. The only problem: that user will likely default before the balance doubles.

But why listen to the Orwellian propagandists?  Just follow the money from corporate insiders: The graphic to the right shows the ratio of insider sells to buys. When the ratio is under 12:1, it’s considered “bullish.” When the ratio is over 20:1, it’s considered bearish. In the last couple of weeks, the ratio has spiked up over 35.

It would seem the Atlanta Fed agrees with the assessment that the economy is far weaker than is being promoted by politicians and Wall Street. Back in February, the Atlanta Fed was forecasting Q1 2018 GDP to be 5.4%. Since then the Atlanta Fed has cut lowering its forecast almost weekly. This past week it chopped its Q1 GDP forecast down to 1.9%.

How can you profit from this insight?   I’ve been presenting several “off the radar” short-sell ideas in my Short Seller’s Journal from which myself and several subscribers are making a quiet killing.  Right now the easiest money to be made in the market is shorting homebuilders.  I have have a subscriber who made 150% on DHI puts in the first 30 minutes of trading today. I have another subscriber who is short Lending Tree (TREE) from $340.  I got this email from him today, with the stock down $42 to $264:  “The TREE keeps on giving. Many thanks!”

Every time the market bounces now, or when individual “daytrader/algo” stocks pop on headline “beats,” it creates an opportunity to make easy money shorting stocks or buying puts.  The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information. This week I’ll be presenting an oldie but goodie short that soared today on tepid numbers (no, it’s not Facebook).

Just wanted to give you kudos for for your Short Sellers Journal. i find myself waiting every Sunday to read your publication. Your research and conclusions ring true. One of the better newsletters I receive. – recent subscriber feedback

313k Jobs Added? Nice Try But It’s Fake News

The census bureau does the data-gathering and the Bureau of Labor Statistics feeds the questionable data sample through its statistical sausage grinder and spits out some type of grotesque scatological substance.  You know an economic report is pure absurdity when the report exceeds Wall Street’s rose-colored estimate by 53%.  That has to be, by far, an all-time record-high “beat.”

If you sift through some of the foul-smelling data, it turns out 365k of the alleged jobs were part-time, which means the labor market lost 52k full-time jobs.  But alas, I loathe paying any credence to complete fiction by dissecting the “let’s pretend” report.

The numbers make no sense.  Why?  Because the alleged data does not fit the reality of the real economy.  Retail sales, auto sales, home sales and restaurant sales have been declining for the past couple of months.  So who would be doing the hiring?  Someone pointed out that Coinbase has hired 500 people.  But the retail industry has been laying off thousands this year. Given the latest industrial production and auto sales numbers, I highly doubt factories are doing anything with their workforce except reducing it.

And if the job market is “so strong,” how comes wages are flat?  In fact, adjusted for real inflation, real wages are declining.  If the job market was robust, wages would be soaring.  Speaking of which, IF the labor market was what the Government wants us to believe it is, the FOMC would tripping all over itself to hike the Fed Funds rate.  And the rate-hikes would be in chunks of 50-75 basis points – not the occasional 0.25% rise.

The Housing Market Is Starting To Fall Apart

Last week I summarized January existing home sales, which were released on Wednesday, Feb 21st. Existing home sales dropped 3.2% from December and nearly 5% from January 2017. Those statistics are based on the SAAR (Seasonally Adjusted Annualized Rate) calculus. Larry Yun, the National Association of Realtors chief salesman, continues to propagate the “low inventory” propaganda.

But in truth, the economics of buying a home has changed dramatically for the first-time and move-up buyer demographic plus flipper/investors. As I detailed a couple of issues back, based on the fact that most first-time buyers “buy” into the highest possible monthly payment for which they can qualify, the price that a first-time, or even a move-up buyer, can afford to pay has dropped roughly 10% with the rise in mortgage rates that has occurred since September 2017. The game has changed. That 10% decline results from a less than 1% rise in mortgage rates.

That same calculus applies to flipper/investors. Investors looking to buy a rental home pay a higher rate of interest than owner-occupied buyers. Most investors would need the amount of rent they can charge to increase by the amount their mortgage payment increases from higher rates. Or they need to use a much higher down payment to make the investment purchase. The new math thereby removes a significant amount of “demand” from investors.

It also occurred to me that flippers still holding homes purchased just 3-4 months ago are likely underwater on their “largesse.” Most flippers look for homes in the price-range that caters to first-timers (under $500k). This is the most “liquid” segment of the housing market in terms of the supply of buyers. Any flipper that closed on a home purchase in the late summer or early fall that needed to be “spruced up” is likely still holding that home. In addition to the purchase cost, the flipper has also incurred renovation and financing costs. Perhaps in a few markets prices have held up. But in most markets, the price first-time buyers can pay without significantly increasing the amount of the down payment has dropped roughly 10%. Using this math, any flipper holding a home closed prior to October is likely sitting on a losing trade.

Similar to 2007/2008, many of these homes will be sold at a loss or the flipper will “jingle mail” the keys to the bank, in which case the bank will likely dump the home. I know in some areas of metro-Denver, pre-foreclosure listings are rising. Some flippers might turn into rental landlords. This will increase the supply of rental homes which, in turn, will put pressure on rental rates.

New home sales – The plunge in January new home sales was worse than existing homes. New home sales dropped 7.8% from December. This follows December’s 9.3% plunge from November. The December/January sequence was the biggest two-month drop in new home sales since August 2013. Back then, mortgage rates had spiked up from 3.35% in June to 4.5% by the end of August. The Fed at that time was still buying $40 billion worth of mortgages every month. With QE over and an alleged balance sheet reduction program in place, plus the Fed posturing as if it will continue nudging the Fed Funds rate higher, it’s likely that new home sales will not rebound like they did after August 2013, when mortgage rates headed back down starting in early September 2013.

Contrary to the Larry Yun false narrative, the supply of new homes jumped to 6.1 months from 5.5 months in December. How does this fit the Yun propaganda that falling sales is a function of low inventory? The average price of a new home is $382k (the median is $323k). New home prices will have to fall significantly in order for sales to stop trending lower. What happens if the Fed really does continue hiking rates and mortgage rates hit 5%?

January “Pending” Home Sales – The NAR’s “pending home sales index,” which is based on contract signings, was released this past Wednesday. It plunged to its lowest level since October 2014. The index dropped 4.7% vs. an expected 0.5% rise from the optimist zombies on Wall St. It’s the biggest 1-month percentage decline in the index since May 2010. On a year-over-year comparison basis, the index is down 1.7%. December’s pending home sales index was revised down from the original headline report.

The chart below, sourced from Zerohedge with my edits added, illustrates the way in which rising and falling mortgage rates affects home sales. The mortgage rate data is inverted to better illustrate the correlation between mortgage rates and home sales:

Housing sales data is lagged by a month. Per the blue line, current homes sales (i.e. February sales/contract signings) have likely declined again given that mortgage rates continued to rise in during the month of February.

The above commentary on the housing market is from the latest Short Seller’s Journal.  Myself and several subscribers have been making a lot money shorting homebuilders this year.  But it’s not just about homebuilders.  I presented ZAGG as a short in the SSJ in the December 10th issue at $19.  It plunged down to $12 yesterday.  I’ve had several subscribers report gains of up to 40% shorting the stock and 3x that amount using puts.

You can find out more about this unique newsletter here:  Short Seller’s Journal

But, What About The Housing Market?

A colleague of mine pointed out that Trump has not been tweeting his flatulence about the economy recently.  This thankful hiatus is after he just passed a tax cuts and a spending budget that is supposed to be stimulative.  As it  turns out, the economy is hitting the headwinds of marginally higher interest rates and a consumer that is bulging from the eyeballs with debt.   Windfall tax rebates to large corporations will not fix this nor will rampant Government deficit spending.

This leads us to the housing market. Mortgage originations were down 5.6% in Q4 from Q3. This is not a result of seasonal bias. Q4 mortgage originations in 2017 were down 26.7% from Q4 2016. One caveat is that the Fed does not breakout the numbers between purchase mortgages and refinancing. But higher rates are starting to affect all mortgage applications. According to the latest data from the Mortgage Bankers Association, mortgage purchase applications dropped 6% two weeks in the row. Declines in purchase apps should not happen moving from January to February, as February is statistically a seasonally stronger month for home sales than January.

Moreover, existing home sales for January were released this morning. To the extent that we can trust the National Association or Realtor’s Seasonally Adjusted Annualized Rate statistical Cuisinart, existing home sales plunged 3.2% in January from December and nearly 5% from January 2018. Decembers headline report was revised lower. I’m sure the King of Spin, Larry Yun, will blame it on “low inventory.”  But this is simply not true:

If Yun’s thesis were true, the chart above would be inverted. Instead, going back to j1998, there is a definitive inverse correlation between inventory and home sales.  Curiously, when attempted to run the numbers to the present, I discovered that the Fed removed the data series I had used to create the chart in in 2015.  Mere coincidence, I’m sure…

The mortgage rate for a 30-yr fixed rate conventional mortgage at Wells Fargo, the  country’s second largest mortgage originator, is now 4.5% with an APR of 4.58%. As recently as September, the rate for a 30yr mortgage was 3.87%. At current rates, the monthly payment for a home purchase with a $400,000 mortgage has increased $187. It may not sound like much, but for many first-time buyers that small jump in monthly payment can mean the difference between buying and not buying.

Since the Fed began printing money and the Government knocked the down payment requirement to 3% on a Government-backed mortgage, homebuyers have based the amount they are willing to pay for a home on determining the highest possible monthly payment the mortgage underwriter will allow. In the example above, the monthly payment on a $400k mortgage at 3.78% is $1,857. At 4.58%, the same payment only “buys” a $363,000 mortgage. This is nearly a 10% decline.

The same math applies to flippers/investment buyers, who pay an even higher rate for an investment purchase. One of the SSJ subscribers is a real estate professional here in Denver. She emailed to tell me that, “it doesn’t take much for interest rates to change Investors ideas.” She has a client who wants to buy an investment home for around $350000. Since investor rate loans are at least a quarter of a point higher than an owner-occupied mortgage, the client’s purchase with 20% down goes up $161 a month from the from the recent jump in mortgage rates. This means he now needs the rent to go up by that much to work on the purchase-decision formula he is using.” I believe that a lot of flippers are going to be stuck with homes they can’t re-sell at the price they paid.

The average price the average-income homebuyer can afford has declined nearly 10% as a result of just a 75 basis point rise in mortgage rates. What happens when rates go up another 50-75 basis points? This fact has not been reflected in the home price data that is released every month from Case-Shiller and from the Government. This is because those surveys have a 3-6 month lag built into the methodology of calculating their respective home price indices.

As it becomes obvious that the price the average potential homebuyer can pay has been reduced from $400k to $363k, it will trigger a price decline cycle similar to 2007-2009. Flippers will be the first to fold just like during the mid-2000’s housing bubble. That housing market crash was triggered by the collapse of subprime lenders, which removed a key source of funding used by flipper and for end-user home purchases from flippers. This time around it will be triggered by a lack of buyers who are able to pay the same price now that they could have paid in September when rates were 80 basis points lower. Soon rates will be 180 basis points higher than in September and home values will be crushed.

The analysis on the housing market above is an excerpt from the latest Short Seller’s Journal,  a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here:   Short Seller’s Journal information.

Housing Market Supply And Demand: Just The Facts

“Housing – people are insane if they think housing isn’t going to get crushed with rising rates. As you outline often, it’s already happening in ( NY, Den, etc. ) I live in LA and most of my friends/ coworkers are telling me how dumb I am to not jump in. I know to just stay quiet, but I think they are about to walk into a buzz saw (again).” – email from a subscriber

The National Association of Realtors reports that December  existing home sales fell more than the NAR led its Wall Street lap-dogs to believe they would decline.   Larry Yun, the NAR’s market elf, has been blaming phlegmatic housing sales over the last two years on low inventory. There’s only one problem with this assertion: it’s not true based on historical data:

The chart above is drawn from data that the Fed, for some inexplicable reason, purged from its FRED database.  It illustrates the inverse relationship – generally – that exists between inventory and sales.   The bigger factor driving the economics of the housing market right now is the deteriorating financial condition of any household that might want to buy a house.  The Fed and Government have largely exhausted the population of would-be mortgagees that can make a 0-3% down payment on a conventional mortgage plus carry the monthly burden of servicing that mortgage.  The tax advantage from deducting real estate taxes was stripped from the equation.

I suspect the Fed is getting worried about the housing market. The Fed’s QE holdings rose $5 billion last week. The entire increase is attributable to an increase in mortgage holdings. Not only is the Fed not reducing its balance sheet, it felt compelled to inject capital into the mortgage market.

One thing to keep in mind. A large percentage of homes purchased and financed with 0-3% down payment mortgages in the last couple of years are underwater. When a buyer puts almost nothing down on a mortgage-financed home, the transaction costs all-in are about 10% of the value of the home. These homes are underwater at closing. Except in certain bubble areas, homes have not appreciated in value enough to make up for the amount that low down payment buyers are underwater when they closed. When the stock market eventually tanks, it will take home values down at least 30-40%, and possibly more.

Just like any market bubble, I believe the housing market is reaching the point of exhaustion. As households continue to get squeezed financially, there will be a lot of homes put on the market hoping for last year’s price. As I’ve mentioned before, when home prices are rising quickly, there’s an oversupply of buyers. When home prices start to drop, the buyers disappear. When prices are rising continuously, it’s very easy to sell a home. When prices begin to fall, it becomes difficult to sell a home. It’s been very easy to sell a home for the last 5+ years. I believe it’s going to start to become difficult to sell a home at current general price levels. The smartest sellers will price their home to move. This will begin the process of “re-pricing” the market lower, which in turn could trigger a flood of flipper homes to hit the market – just like 2007/2008.

Greenwich, Connecticut housing values are down 20%. Greenwich would be the “poster child” for the high-end housing market. NYC values are starting to get hammered. For taxpayers who itemize, the new tax law limits the deduction for State, local, sales and property taxes to $10,000. This will hammer the high-end market, which in turn will put downward pressure on everything below it.

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