The Government has a set a new standard for meeting expectations of unreliable data reports. I warned this would happen in my blog post on housing yesterday. The Census Bureau reported this morning that new home sales for August jumped 18% from July, coming in at a 504,000 seasonally adjusted annualized rate. This was biggest month to month jump since 1992 and the highest level of new home sales since May 2008. At this point I can’t even get on the CB website to drill down into the dirty details, so I’m going with the headline numbers, which are simply not even remotely believable or possible.
To begin with, 93% of all new home sales are financed with a mortgage. I dug up the weekly numbers for mortgage purchase applications from the Mortgage Bankers Association, which showed that purchase applications declined 4 out of the 5 reporting periods for August. Every week in August declined 10-14% on a year over year basis for the respective week. Here’s the decline in purchase mortgages:
New home sales are based on contract signings. With 93% of all new home sales purchased using a mortgage, how is it even remotely possible that the new home sales for August jumped 18% vs August and even more vs. August 2013? It’s just not mathematically possible.
In addition, I have now looked at the latest quarterly earnings reports for most of the nation’s largest new homebuilders. All of them reported either flat or negative numbers for new orders. Furthermore, as I’ve highlighted in my two most recent homebuilder stock reports, two of the biggest builders stated that the market was getting weak. In fact, the Census Bureau reported new home sales in the West rose 50% from July and 84% year over year. This is outright fraud, here’s why: in my latest homebuilder report, I feature a builder with significant operations on the west coast. This builder specifically cited a weak outlook for sales. Furthermore, based on regional reports from both the Bay Area and Southern California – which I’ve detailed in some previous posts – the housing markets in both those areas are starting to deteriorate significantly.
Finally, the Census Bureau is reporting a sizable drop in months supply of inventory. Again, I defer to what the actual new homebuilders are reporting. Every single new homebuilder company with public stock is reporting their highest amount of inventory since the housing bubble peak. Every single one. How is it earthly, let alone mathematically, possible that new home inventory dropped in August? That’s right, it’s not.
But don’t take it from me, here’s what the big money is saying – the homebuilder stocks are down today despite the new home sales report (click on graph to enlarge):
The Dow Jones Home Construction Index is down almost 1% today as I write this, despite the fact that the Dow Jones is up .5% and the S&P 500 is up over 8 points. Not even the stock market believes the new home sales report because it’s simply not believable or even mathematically possible.
The DJUSHB is down almost 16% since its May 2013 dead-cat bounce peak, despite the fact that the S&P 500 is up well over 22% since then. The DJUSHB bounced to a lower high again by mid-summer this year and is currently down almost 11% from then. This is despite the fact that mortgage reates are at 12-month lows and not far from all-time lows. That should tell us everything we need to know about the condition of the market.
If you have not looked at any of my homebuilder stock reports but want to take advantage of a market set-up to make a lot of money shorting the homebuilders, you should do it now. When these stocks start to really tank, it will happen quickly. If you are not comfortable shorting stocks outright, each report has a section which discusses how to use puts and calls to replicate shorting the stock. I also offer some basic trade management strategies because this sector can be volatile. Homebuilder Stock Reports.
If you look at a graph of the DJUSHB going back to early 2008, you can see how quickly these stocks unravel once the heavy selling really kicks in. I believe 70-80% returns can be made just by shorting now and holding. More can be made if you trade the market around. I am pretty certain that the company featured in my first report (third down on the list) will eventually have to file for bankruptcy, as it has as much debt now as did at the peak in 2005 despite a unit sales base that is 1/3 the level of 2005 and declining now.