Tag Archives: New home sales

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

 

 

Statistical Witches Brew Belies The Truth About The Housing Market

The fundamentals of housing are so weak that when the tide does start to go out because of different possible catalysts, it’s going to reveal a mess.  – comment to me from a reader who is watching the disintegration of the housing market “recovery” in California

Despite all of the bullhorn, rah rah rhetoric coming from the National Association of Realtor’s chief cheerleader, Lawrence Yun, the massive intervention in the housing market by the Fed and the Government is beginning to fade quickly.   I guess in the face of evidence far too overwhelming and obvious to cover up with propaganda-laced sound-bytes about “strong jobs growth” and “low inventory,”  the NAR has been forced to admit that the energy market depression – LINK.  At some point, when the “tide does start go out,” everyone is going to wonder why the NAR’s seasonally adjusted hocus pocus data has not transmitted into actual, bona fide sales.

I wrote an article for Seeking Alpha which explains the corrupted foundation underlying the NAR’s statistical witches brew.  In fact, I have evidence direct from the Fed that shows the “low inventory” narrative is 100% false – sales and inventory levels are actually inversely correlated.  Funny thing, that.  But it won’t be funny to the people who chased the price of their dream higher by listening to the “wisdom” of their “friendly” house broker.  You can read my article here:   Existing Home Sales For October Drop More Than Expected.

I toured some middle/upper middle neighborhoods yesterday that up until recently had very little on the market.  Mysteriously, a lot of homes seemed to have popped up on the market for sale in the last few weeks.   I was wondering if perhaps the home broker community had convinced their “pending” sellers to list their homes for Black Friday Month.  You have wonder, what is going on that would cause someone to list their home going into the slowest seasonal period of the year for homes sales?

Housing Starts Plunge 11% – Signals Renewed Downturn In The Housing Market

The monthly contraction of 11.0% (-11.0%) in October 2015 housing starts was muted by a downside revision to September 2015 activity, yet it came in well below already-negative market expectations…With headline negative detail in October, and downside revisions to August and September detail, the aggregate housing-starts count fell at a revised annualized-quarterly pace of 1.6% (-1.6%)…Based on October’s one-month reporting, the aggregate housing-starts count was on target to contract an annualized quarterly pace of 28.6% (-28.6%) in fourth-quarter 2015.   – John Williams, ShadowStats.com

It’s happening everywhere, not just in Denver.  The “for sale” signs are piling up at the wrong time of year for people to be listing their homes and the “price reduced” signs tell us the sellers are chasing prices lower.   The statistically brewed inventory measurement metric published by the  National Association of Realtors has big lag built into it.  Especially when the current rate of monthly sales is well below the seasonally adjusted, annualized rate cesspool that vomited out by Larry Yun and his confederacy of statistical dunces.

Anyone who bought a home anywhere in the country, except maybe a in a few statistical outlier areas (and those areas will soon catch down to the rest of the market), with a 10% down or less mortgage within the last six months is now underwater, especially when transaction/closing costs are factored in.  Most “first-time” buyers have been using 0-3.5% down mortgages.  They’re now drowned in mortgage debt.

The pundits will blame the housing starts report on a big drop in multi-family unit starts.   The the housing starts numbers originally reported in August and September were revised lower.   It doesn’t matter.  Almost every major city either has a glut of apartment buildings now or will soon.  The truth is, single-family unit housing starts have been flat to down all year.

One of the best “hidden” indicators that the housing market is now contracting is in mortgage activity.  LoanDepot Inc had to pull its IPO late last week – LINK.  LoanDepot is part of the non-bank mortgage lender segment of the mortgage industry, which now accounts for 40% of all mortgage dollars originated.   There’s a lot of reasons this deal was pulled, but perhaps the biggest one was that LoanDepot’s mortgage volume took a big hit in Q3.   When home sales slow down, less mortgages are originated.  Pretty simple math.  It also suggests that professional investors see the same downturn in housing that I see.

Although the dynamics of the current housing market “boom-let” differ from the dynamics of the big housing bubble.   What has occurred since 2010 is a Fed/Government stimulated dead-cat bounce in the context of the secular bear market in housing.  The policy-makers, urged on by the greedy bankers and housing industry chieftains, never allowed the “cleansing” process from the housing bubble to clear itself out.   There’s been plenty of mortgage fraud and subprime activity, but it’s been better disguised over the last couple of years.

The homebuilder stocks are now one of the most overvalued sectors of the stock market. With careful 2ReportSpecialpositioning and trading, there is a lot money to be made on the downside with these stocks.  Despite the recent run-up in the S&P 500, the stock prices of my two most recent homebuilder reports are still below their price when I posted these reports.  One of them experienced declining new home sales unit closings for the past two quarters and one of them, quite frankly, may hit the wall in last quarter of 2016.  My reports show in detail why these two stocks can be profitably shorted – including suggestions/examples on using puts and calls to replicate shorting a stock – and I am offering them together for a special price.  Click on this link or the pic on the right to take advantage of this opportunity:   Homebuilder 2-report Special

Retail Sales Are Crashing – Housing Sales Are Next

Flippers are getting stuck with houses they can’t flip for a profit. Hedge funds have stopped buying and have begun selling. Anyone dumb enough to have been lured into this market in the last few years will be underwater in no time. The foreclosure train will be leaving the station shortly. We’ve been here before. It was ten years ago. Some people never learn.  – The Burning Platform

Last week in the stock market featured several “cliff-dive” drops in retail stocks:  Macy’s, Nordstroms, Advance Auto Parts.  The middle class (yes, “middle class” includes the wannabees living beyond their means in million-dollar “mcmansions”) is tapped out of disposable income and has run up against is ability to take on more debt.   The Nordstrom’s report is what has really freaked out economic analysts:  LINK.

The housing market will show the affects of a rapidly deteriorating economy next.   I noticed something had changed in the housing market in mid-summer based on all of the available data I analyze.  Interestingly, the CEO of Redfin agrees with me:  Something We’ve Seen In The Last Month Should Make You Worried About The Housing Market.

I noticed that the number of listings all around Denver began to increase rapidly.  The NAR’s manipulated “months supply” metric is lagged by a few months and does not pick up big increases in listings right away.  I  noticed this especially in the higher-end areas all around Denver.  My observations have been confirmed in San Francisco:   LINK and in New York:   LINK and NYC/Washington DC:  LINK.

The small bump up in home sales that resulted from Fannie Mae and Freddie Mac lowering their down payment requirement from 5% to 3%  has now run its course.  It’s pulled sales forward and coerced a lot of people to overpay for a home – most of them are households that, over the long term, can not afford the monthly cost of homeownership.   Anyone who bought a home within the last 6 months in almost every major city and used a 10% or less down payment is now underwater vs. their mortgage.  Many are now starting to realize this which is part of the reason retail sales are tanking.

The homebuilder stocks are now more overvalued than they were at the peak of the housing bubble – using ANY financial metric.   What’s different is that the Fed is now out artificial fuel to power the next phony housing “recovery.”  The homebuilder stock are set up for a spectacular drop.

My two most recent reports are being offered for a short period of time in a two-report special price.  Each report is $30 or you can buy both reports for $45:    Two Homebuilder Stock Report Special

Note:  If you have purchased either the Low End Homebuilder report or the Red Flag Alert report, please contact me if you are interested in adding the other report for $15.

One more point of note:  DO NOT overlook or underestimate the fact that big homebuilders like Lennar are now offering ZERO-DOWN mortgage financing in many of their new home communities.  Lennar is not the only homebuilder offering mortgage incentives to move homes.  Many homebuilders are now showing a big increase in “mortgages held for sale.”  These are mortgages that can not be off-loaded on to the taxpayer because they are subprime quality.   The homebuilders are stuffed to the gills with inventory right now.  

This Homebuilder Could Default In 2016

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

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

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

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

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

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

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

Short This Homebuilder Bounce

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

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

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

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

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

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

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

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

Homebuilders Were Ripped Lower – Again

In an acknowledgement of how insanely overvalued the homebuilders are, the Dow Jones Home Construction index is down another 3.5% today. It’s down 5% from last Friday’s close, despite all the “good news” about the economy this week:

Homebuilder Stocks

The catalyst today was bit surprising. Meritage, a somewhat smallish homebuilder missed its net income bogey. I guess the fact that it guided well below what the snake-oil salesmen on Wall Street were pimping is what has undermined this stock, which is down 9% today. But it’s an insignificant factor in the Dow Jones Home Construction index.

This tells me that the market is starting to unload the homebuilders on any scrap of not-positive news. The hedge funds are substantially overweighted in this sector, as the homebuilders have been short-squeeze momentum darlings for quite some time.

Crispin Odey was in Zerohedge earlier this week  LINK  bragging about being short the stock market.  Ironically, the homebuilders are one of his largest long positions. His shorts will be more than offset by the huge beating he is going in incur from being long homebuilders.

The homebuilders are more overvalued now than they were at the peak of the housing bubble. I have several research reports which show in detail why these builders are all going below $10, many below $5, and some will hit the wall and disappear. I am offering my older reports for a package price, but as soon as earnings season over over I will be updating all of them and raising the price.   HOMEBUILDER REPORTS

If you are interested in purchasing my homebuilder reports in a package deal, contact me at this email address: investmentresearchdynamics@gmail.com LINK.   Anyone who has purchased my reports is entitled to receive the updates as part of the purchase price.

Pulte Home Misses By A Country Mile

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

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

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

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

SPXvsHomebuilders

New Homebuilder Report: Large Homebuilder With Declining Unit Sales

Today’s housing starts number for September was highly misleading, as the overall headline result was skewed by a big jump in multi-family units, primarily 2-4 unit buildings.  Single-family home starts declined 5% from August to September.  It’s the single family unit starts that are relevant to publicly traded homebuilders.  Their stocks continue to be more overvalued today than at the peak of the housing bubble.

I have a new homebuilder short-sell report posted.  I want to share an interesting story about this Company, which further adds to the number of “red flags” I have found buried in this Company’s financials.

In late 2013 I wrote an article showing how this Company was managing its earnings per share with share buybacks and inappropriate NOL reversals. Mr. Zeumer sent me an email questioning my math on the effect of the share buybacks and Net Operating Loss reversals. I replied by saying that my math was laid out in detail in the article and that if he was confident that the Company’s math and its use of NOL reversals was appropriate, then he and rest of upper management should take after-tax cash from their bank accounts and buy the stock for their own accounts. I added: “we know that management has been good at selling stock into the Company share buybacks.”  Not surprisingly, I never heard back from him after that.

This particular Company reports its earnings soon. While I have no opinion with regard to whether it will miss consensus or use the accounting gimmicks I present in the report to engineer a “beat,” the Company did miss earnings last quarter. I would suggest the way to play this one is to take a partial short position ahead of earnings with the intent to add if the Company “engineers” a beat and the stock pops, or wait until after earnings to start building a short position. Either way, this stock is eventually going a lot lower:  NEW HOMEBUILDER SHORT-SELL REPORT

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