Tag Archives: New home sales

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 Housing Market Bubble Is Popping

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

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

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

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

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

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

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

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

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

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

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

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.

Toll Brothers Stock Jumps On Declining Revenues And Earnings

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

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

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

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

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

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

A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th.   30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:

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The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index.  I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:

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The data is through December 2nd, as mortgage application data lags by a week.  As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows.  This is not unexpected.  Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing.  Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.  Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor”   that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials.   Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept.  On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%.  – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt.  In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage.   This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago.  If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file.  I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the most widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports).  The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable.   But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index.  I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication.  I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites.  I also present short-sell ideas, including recommendations for using options.   Despite the run-up in the broad market indices, there’s stocks everyday that blow-up.  Last Restoration Hardware plunged 18% after reporting its earnings.   You can subscribe to the Short Seller’s Journal by clicking on this link:  SSJ Subscription.   It’s monthly recurring and there is not a minimum number of months required.

More On The Government’s Fraudulent New Home Sales Report

This is from a reader who posted this comment:

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

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

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

More On Yesterday’s New Home Sales Fraud

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

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

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

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

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

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

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

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

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

BREXIT Is Being Used To Deflect From The Economic Collapse

I actually could care less about BREXIT.   I have yet to encounter any valid analysis on why the issue matters at all.  What is valid is that the BREXIT theatrical show is being used to deflect scrutiny of the continuous economic reports  showing that the U.S. economy is collapsing.

The Chicago Fed National Activity index released today plunged to -.51 against Wall Street’s expectation of a .11 gain.  Last months data-point was revised lower to barely positive.  The way that this index is calculated, it takes a lot to move the needle.  A drop from a revised lower .05 to -.51 reflects heavy contraction in economic activity across a broad (85 indicators) spectrum of the economy.  The 3-month moving average declined from -.25 – which was revised lower from the original .22 reported – to -.36.

New home sales reported today – for whatever the data series is worth – indicated an 11% plunge from the previously reported number for April, which of course was revised lower. May’s print was down 6% from the revision.  Ironically,  yesterday the National Association of Realtor’s Chief Economic Clown was extolling the virtues of new home construction and sales activity.  Oops.

I suggested yesterday that existing home sales report was highly overstated by the seasonal adjustments imposed on the data collected.  The Census Bureau, which prepares the new homes sales data series, has admitted in the past its estimation and adjustment models tend to overstate sales when actual sales are in a downtrend.  Ergo, the incessant downward revisions of previous reports.  Same with existing home sales, as the NAR uses the same statistical modelling package as the Census Bureau.  The NAR’s report yesterday contained a significant downward revision for April’s report, not coincidentally.

To be sure, there are still some hot pockets of housing activity around the country.  But most of the large economic areas are experiencing falling demand, falling prices and rising inventory, especially in the upper price segment of the market.  The collapse of the current housing bubble will be even more spectacular than the last bubble collapse.

The U.S. economy is collapsing.  In the “inside out” world of U.S. financial media Orwellian propaganda, today’s jobless claims number is being used to substantiate a “tight labor market.”  That’s a complete fairy tale.  The reason jobless claims are historically low right now is that the number of workers as a percentage of the workforce who qualify to apply for benefits when they get fired is at a historical low.  This fact is substantiated by the historically low labor participation rate and the percentage of the workforce that is now part-time.   Part-timers do no qualify for company healthcare or unemployment insurance.  It’s that simple. the  I would question the data if jobless claims were high.

So the entire financial world is focused on what is largely an irrelevant  referendum  on whether or not the UK will remain in the EU.   Meanwhile, the rug is being pulled out from under the entire western economy, including and especially the U.S. economy.

Housing Sales Start To Tank As Suprime Auto Loan Delinquencies Soar

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

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

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

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

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

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

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

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

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

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

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

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

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

Energy Debt Is Imploding – Housing Market To Follow

“The banks are still clinging to their reserve reports and praying.  The bonds are all toast. Most are in the single digits or teens.”

I asked a former colleague of mine from my Bankers Trust junk bond days who is now a distressed debt trader what was going on in the secondary market for energy sector bank debt and junk bonds.  The quote above was his response.

Zerohedge posted a report last night with a Bloomberg article linked that describes what is going on – “Assets selling for far less than what companies owe lenders – Creditors are left holding prospects no one wants to buy.”   the article further cites the ridiculously small reserves that four biggest banks in the energy sector have set aside:  “Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low”  – (Bloomberg).

Considering that those four banks combined probably have at least $100 billion of exposure to sector – not counting the unknowable amount of credit default swaps and other funky OTC derivative configurations the financalized Thomas Edisons at these banks dreamed up – the $2.5 billion in loss reserves is a complete joke.  It’s an insult to our collective intelligence.  Of course, Congress and the SEC took care of the problem of forcing banks to do a bona fide mark to market after the 2008 financial crash.

This is the 2008 “The Big Short” scenario Part 2.  The banks underwrote over $500 billion in debt they knew was backed by largely fraudulent reserve estimates.  I bet most of the “professional” investors at pension funds and mutual fund companies were not even aware that oil extracted from shale formations trades at a big discount to WTI.  When creditors go to grab assets in liquidation, they’ll get a few handfuls of dirt to resell.  And when the bondholders go to grab assets, they’ll get an armful of air.

The same dynamic is about to invade and infect the housing market.  Notwithstanding the incredulous existing home sales report released on Friday – (how can the NAR expect us to believe that December experienced the largest one month percentage increase in existing home sales in history when the economy is sliding into recession and retail sales were a disaster?) – the housing market is on the cusp of imploding.  I was expecting to see a unusually high number of new listings hit the Denver market right after Jan 1st and so far my expectations have been met. The acceleration of new listings is being accompanied by a flood of “new price” notices.   I believe a rapid deterioration in home sales activity will take a lot of the housing bulls by surprise.

The stock market’s reflection of my assertions about the housing market is exemplified by the homebuilder stock I feature in this week’s issue of the Short Seller’s Journal.  This stock is down 16% from when I first published a stock report on this Company in 2014. This is a remarkable fact considering that the S&P 500 is down only 4% in the same time period AND the Dow Jones Home Construction Index UP 8% in that time period.  This company happens to originate a high percentage of the mortgages used to finance the sale of its homes.

The company relies on an ability to dump these mortgages into the CDO and Bespoke Tranche Opportunity configures conjured up by Wall Street in order to seduce dumb pension and mutual fund money into higher yielding “safe” assets.   As the energy debt market implodes, it will cause the entire Wall Street supported asset-backed credit market to seize up.  The next biggest losers after the energy sector will autos and housing.

This week’s Short Seller’s Journal features the above housing stock plus a copy of the report I originally published (the data is old but the ideas behind why the stock is a short are intact, if not more pronounced) plus I have presented two “Quick Hit” energy sector stock short ideas. All three ideas are accompanied with my suggestions for using puts and calls to replicate shorting the stock  You can access this report here:Untitled