Tag Archives: subprime mortgages

The Housing Market Has Stalled

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

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

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

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

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

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

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

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

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

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

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

Peak Housing Bubble: 2008 Deja Vu All Over Again

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Peak Housing Bubble: The Big Short Is Back

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Government Sponsored Mortgages Go Full Retard: 2008 Redux-Squared

This is a note to me from one of my Short Seller Journal subscribers:

As a 20 year real estate agent, investor and wholesaler in Atlanta,  I’d like to add my comment to your analysis. I totally agree that things are not what they seem to be in housing.  I despised the NAR [National Association of Realtors] when I was a member because of their “it never rains” housing reports and their confiscatory attitude toward realtor dues and their subversive political activity.  I eventually gave up my agent’s license when they started forced PAC contributions in 2010.  Edward Pinto of the American Enterprise Institute told me that NAR is spending $55 million a year for lobbying on housing issues. The NAR never met a loan they did not like.

I’ve been working the Atlanta metro housing market since the early 1990’s. I can tell you that this time around is different in that the home buyers I’m seeing in entry level FHA neighborhoods are mostly “minorities” (some are refugees), and virtually every neighborhood in my general area northwest of Atlanta is being sold with 100% financing via USDA loans. There is NO equity in these neighborhoods, and most of the selling prices are as high or higher than 2006-07.  The mortgage fees and costs for things like PMI and funding fees are added into the payment along with ever rising tax and insurance payments. The outcome is not going to be pretty.

I do not know when exactly, but at some point, I’m going to make that massive killing in housing stocks that I missed out on in 2009. I knew that crash was coming as early as 2004, from reading mortgage data, but I did not think to short the home builders! This time I won’t miss.   Enjoy your work very much.

There you have it. That’s the truth from the trenches.  “The NAR never met a loan they did not like.”  But guess what?  All these 3% to no percent down payment mortgages are being subsidized by you, the taxpayer.  Instead of Countrywide originating subprime  nuclear waste and dumping it on Wall Street (and into your pension fund), this home finance scatology  is being sponsored by the Government through Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA.

Now Quicken – through Taxpayer-sponsored Freddie Mac – is offering 1% down payment mortgages (LINK) that also avoid the use of PMI insurance.  The PMI insurance is was a requirement for low down payment mortgages (below 20%), but the NAR and other PACs successfully lobbied to have this requirement removed.  The funds from PMI were put into a trust that was used to help cushion blow when low  down payment buyers defaulted.  It was a thin layer of protection for the Taxpayer.  Now that’s been removed.

Most of the homes being sold to actual buyers are now financed with Taxpayer funded subprime mortgages.  If you note in the article about the Quicken product linked above, it references that these are not considered “subprime” mortgages thanks to rule changes.  We can call a “nuclear bomb” a “snow cone” instead, but it’s still a nuclear bomb.

When a buyer closes on a low down payment house, the buyer is underwater on the mortgage after netting all the costs that are included.  Home prices are not going up as reported by Case Shiller and the Government.   Look around at all but the hottest markets and you’ll see a plethora of “price reduced” offerings.

This is going to get ugly again.  Interestingly, I run into lot of people who agree with me that what’s coming will be worse than 2008.   I reiterated a short on a big homebuilder less than two weeks ago that is down almost 9%.  Despite the general upward push in the SPX since mid-Feb, I’ve had several picks that are down double-digits on a percentage basis, including a mortgage company that’s down 15% since late March, a consumer durables stock down 17% since mid-April and an auto seller that’s down over 18% since early June. This is because the Fed is concerned with propping up the Dow and the S&P 500  for propaganda purposes.  But individual stock sectors are melting down.  The home construction and auto sectors will be a blood-bath.

You can access my research with these ideas here:  Short Seller’s Journal.  It’s a weeklyNewSSJ Graphic  report for $20/month delivered to your email on Sundays. In recent issues I’ve been reviewing past ideas that have not worked since mid-Feb because of the Fed’s market intervention. Many are better shorts now than back then, as conditions in the general economy have deteriorated since then.  I also provide at least one new idea per week.

Subscribers can also access a 50% discount to the Mining Stock Journal.

 

More On Housing – 2008 All Over Again

This commentary is from a subscriber to my Short Seller’s Journal:

The 3% down loans seem to have brought in a lot of first time buyers into the market. I live in the east bay area of California, which is more affordable than San Francisco, or the South Bay area but still painfully expensive nonetheless. Rents are now the same as a mortgage payment on a home in the exurbs.  So a lot of people seem to be buying for this reason. They only look at the monthly payments but overlook the fact that when financial markets seize up and the music stops, you could be left holding the bag on a hugely upside down mortgage and can’t get out of a 30 year commitment by selling.

A friend of mine, who is a borderline novice in financial matters, just bought a home. He has meager savings and has jumped on the 3% down bandwagon. This is the guy who until I told him to pay off his credit card balances because of the usurious interest rate, had no clue the damage they were doing to his finances.   He was making minimum payments on them because he wanted to build up his savings –  I explained to him how by earning 0.01% interest and paying out 18-24%, his savings were getting depleted every month.

The Bottom line is people who are not too financially savvy are being lured into the housing market by the banks. I don’t know how long this 3% crap has been going on, but it seems that Banks are desperate and looking for newer segments of people to swindle.

Everyone has probably seen the report on NYC high end real estate posted in Zerohedge – LINK.  While the suburbs in Denver are still hot because of the huge influx of people moving here from California,  I’m seeing the same price cuts and inventory build-up  in Denver that is described in the ZH piece.  I get listings on just one central Denver zip code. Yesterday alone i received two price changes of 5% on listings over $850k.The inventory in that price segment is bulging.  Over the weekend I was hit with more than 20 new listings and price cuts all across the price spectrum.  I have received six more today – 1 new listing and five price reductions.

Now that the NAR is begging the Government to give debt-bloated college graduates even more debt to buy a crappy starter home, I can smell the desperation to keep the housing market’s “gerbil” running on the wheel.  But the gerbil is like a meth-addict that has been overdosed for too long with near-zero interest rates and recklessly lascivious Government mortgage subsidies.  Like the gerbil, the housing market is about to seize up and re-collapse.  It will be an event that is much more horrific than what occurred in 2008.

The mining stocks are one economic convulsion away from from more than doubling in value.  –  “Hal,” long-time friend/colleague

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).