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.
I was chatting with an Denver-based real estate professional yesterday. This person stated outright that the real estate market was in an insanely overvalued bubble that was going to pop.
It’s pretty obvious to anyone who makes the decision to look at the facts. For instance, the media, Wall Street and industry association promotional juggernauts (National Association of Realtors, National Association of Homebuilders) continue to gloat over the supposed continuous price increases being reported by highly statistically unreliable data series like the Case-Shiller housing price index (Even Robert Shiller has admitted to this series’ flaws in the past).
Every metric promoted in the headlines is based on “year over year” comparisons. A far different truth emerges when you shine the light on month to month changes in price. In fact, I linked an article in a blog post earlier this week (LINK) which showed that 30% of all homes across the major MSAs lost value over the last year. In many markets, prices have been declining for most of this year to date when measured serially month to month.
In just about any market across the country, if you closed on a home in June and used a 10% or less down payment, you are now underwater on your mortgage. That’s a fact agreed upon by my friend mentioned above.
Aaron Layman, based in Houston and one of the few truly honest real estate professionals, posted commentary today which shows just how extremely misleading media reports about the real estate have become. His example uses the Houston condo market, but the same type of relative numbers apply to most large MSAs:
- Annualized sales of townhomes/condos are down 1.6 percent, but inventory is up 12.9 percent.
- Annualized sales of highrise condos are down 14%, but inventory is up a 16.1 percent!
- The median price of combined new and existing highrise construction is down 11.6 percent.
- The median price of new highrise construction in Houston has shown ZERO appreciation from last year!
- Annualized sales of new highrise condos are down a stunning 75 percent!
Inventory of new highrise condos in Houston is up 44.2 percent!
- MLS shows 111 months of inventory for new highrise construction in Houston!
You can read all of Aaron’s commentary here: LINK
That same dynamic is definitely occurring in Denver. And the non-stop rise in rent prices being reported all over the place is just outright wrong. Nearly every building in Denver is offering some type of rent concession to sign a year lease, with some offering up to two months free. Denver has been cited as allegedly one of the hottest markets.
The homebuilders are more overvalued now than they were at the peak of the housing bubble. We’ve already seen one homebulder stock lose over 9% in one day. I happened to have published a research report on this company about 4 days before it reported. You can still take advantage of the significant amount of downside that remains in this stock, which is loaded with red flags – including an ongoing IRS audit: RED FLAG ALERT HOMEBUILDER
The Mortgage Bankers Association mortgage purchase applications index dropped again last week. It fell 3% week to week (seasonally adjusted), it fell 14% unadjusted and it plunged 12% year over year. This has been the pattern almost every week this year.
This is particularly bad news for the new homebuilder companies because 93% of all new homebuyers use a mortgage to make their purchase. If purchase applications are not being filed, new homes are not being sold. There’s no room for spin in that. The numbers are the numbers. In my latest research report, the company I feature specifically had to disclose that its contract signings are dropping. Hovnanian reported just this morning that contract signings dropped 9.2% year over year. This is going to turn into a bloodbath.
My latest research report idea is my best work yet. I go into very specific areas in which this company engages in borderline accounting fraud. I have never seen another publicly available research report which delves into the misleading accounting like this. It is a unique report and it makes a compelling argument for why shorting this homebuilder stock now, with careful position management, offers the potential to make $20,000 for every 1000 shares shorted over the next 18-24 months. A 70% ROR.
The homebuilder sector is the biggest no-brainer short-sell opportunity I’ve seen since the internet bubble. No one is looking at this sector. The industry organizations continue to distort the truth and promote a “recovery” that is not happening.
The Dow Jones Home Construction Index did that nefarious “death cross” a few days ago. This is when the 50 day moving average crosses below the 200 day moving average (click on graph to enlarge):
Whenever gold does the “death cross,” it’s all you hear about on CNBC, Bloomberg and Fox. None of those entities have mentioned a peep about this for the homebuilder stocks.
All of the indicators are aligned for another leg down in price. The technicals are supported by deteriorating fundamentals.
You can access my report here: Short This Homebuilder Now
At some point institutional investors and hedge funds are going to get ahold of my report and start selling their position in this company (mutual funds, etc) and shorting the crap out of the stock (hedge funds). You want to get in ahead of that.