Existing Home Sales Drop Unexpectedly In April – Underlying Data Is Bearish

One aspect of home sales that EVERY analyst is overlooking, especially the bubbleheads on financial tv, is the investor component.  Realtytrac, of all sources, published an article in which it presented data showing that home sales are now being driven by mom and pop – i.e. retail – investors.  It furthermore showed that the big investment funds are starting to sell their holdings into the retail investor bid.  Of course, this article was never thrust into mainstream focus.

Do you see the OBVIOUS analogy here?  Institutions selling to retail…at the top of the market?  Ever seen this dynamic  before?

Even more stunning is that Realtytrac’s data showed that the retail “investor”/flipper is increasingly using mortgages to make their purchases, rather than cash.

I have written article for Seeking Alpha in which I explain why the April existing home sales report was even more bearish than conveyed by the headline reports.  Furthermore, I show a rather glaring discrepancy between data from the NAR’s website and the National Association of Realtors chief ecomists’ claim that home sales are lagging expectations because of low inventory.

You can read my full analysis here:   Existing Home Sales Driven My Retail Investors Using Debt

One point of note on the table above. The chief economist of the NAR has been suggesting the that existing home sales have been lagging expectations because of unusually low inventories. This is simply not a fact-based assertion by the NAR’s own numbers.

I’m already starting to see these signs in the higher-end areas of Denver – it won’t be long until we these signs all over the place:price-reduced-two

19 thoughts on “Existing Home Sales Drop Unexpectedly In April – Underlying Data Is Bearish

  1. The Real Estate market is a full of lies as any market. Hardly a day goes by that I don’t read some insider calling the market robust and growing as the underlying economy has been growing ….seriously? My next door neighbor just put his house on the market as a for sale by owner. I got on Zillow to see what he was selling against. Was sorta shocked to see that of the 1400 properties for sale in our market 400 were in foreclosure or had been foreclosed…. I was frankly shocked by those numbers. Now part of that market was lower end homes in the city but still that’s 29% of the homes in “distress”.

    My brother in KC sold his $265,000 home in 2 hours last month at $10K over list with the buyer covering all the closing expenses. He is kicking himself for not waiting to let the other 10 prospective buyers look at it too. Especially since he had to move in with his Mother in Law for 2 months while he waits for his house to be completed.

    It seems that market value range is still in demand and when you factor in mortgage payments at 3% the monthly is still less than the $89,000 dollar home I bought in Chicago (Naperville) in 1981. Mortgage interest rates were +15% then. Only difference is the amount of interest you can write off (less) and a lot more property tax.

    Got to imagine if they ever let rates go up it will totally finish off the market or prices will have to nose dive to maintain affordability. My brother is holding his breath that rates don’t climb before his house is finished. He told me if rates climb 150 basis points or more he is screwed on his new payment level. I will hold my breath for him too even though I tried to talk him out of it…..His wife is a elementary school counselor and his is a court officer. Not making big bucks but shelling our +460K for a new house….NUTS.

    1. KC – Just for laugh take a look at asking prices in the Nape now – your 81k price of 3 decades ago couldn’t make a couple years worth of mortgage payments now.
      NUTS is correct.

  2. Dave:
    I was visiting a friend in the hospital a couple of days ago. CNBC was on the TV, while I sat there three stories where presented. First that the divergence between the Dow ind. and trans. means nothing this time, second that there is a real-estate boom going on in Denver with bidding wars for single family homes and third gold maybe looking at 700.00 in the near future. Felt like I was look down the rabbit hole.

    1. Alice and Wonderland. There are bidding wars for homes in the $250k – $600k range. 35% of all homeowners in Denver
      with a mortgage have effective negative equity so they’re not selling – yet. Per my blog post today
      “investors” are now taking out mortgages to buy flips/rentals. That’s what’s driving up prices.
      This will not end well.

  3. Yepper really nuts in Naperville. Was up there a couple of years ago and was shocked at what they were getting. Now I wasn’t high end north of Ogden behind Connie’s Pizza just west of Naperville Road off Iroquois. Was a pretty large subdivision that had about sold out. The 4 models were foreclosed on and we bought one of them. Had a little vandalism in one of the bathrooms, mirrors were profanity scratched . Tri level about 8 years old 3 bedroom, 2 bath. 1800 square. Quite a bit of sweat equity remodeling sold it for $149K, 9 years later.

    Funny story two attics one over the living room the other attic over the bedrooms. After about a couple of years decided to DIY some insulation. Rented the blower and had my bride dumping insulation into the blower while dumbass was blowing the insulation. Got the first attic done and open the second attic crawled in and and guess what was hanging off all the rafters….Pot Plants. Crawled down the ladder stuck my head out the window and yelled down to my wife who was now being helped by my neighbor. Guess what’s in the attic…he yells back….A bunch of pot plants. I said how did you know that. He said my attic was full of them too. He had moved in about 2 weeks before me same deal bought the foreclosure. He said its not any good don’t get excited.

    Took his word for it anyway following Monday about 6 giant well stuffed Hefty Bags of plants went to the dump… Somebody was using that corn field next to the sub division for more than raising corn! When we left in 1990 they were building $400K houses on the east side of Iroquois Rd. Can’t imagine what they are selling for now.

  4. The housing bubble burst in 2007/2008 and no one learned their lesson.

    Wait for housing bubble bust part 2 in the future.

  5. I was reading Alasdair Macleod’s article “Inaccurate Statistics and the threat to Bonds” In it he references “The Chapwood Index” , which is an alternative study that measures inflation. According to the article inflation is running around 10% annually since 2011. That’s something to contemplate; Housing, food, healthcare, etc. I’m not getting pay increases to reflect the inflation reality. Unfortunately, the 10% inflation rate is additive. At some-point…we will hit an inflection point, and then. And then we shall see what happens. I know I don’t agree with Dave on this point, but I don’t think housing will deflate like it should. I think the government will continue to fraudulently keep the pump going. Their intentions are clear. I think Gold, Silver, and other assets that don’t have counter party risk are the strong plays of the future. Housing prices will not keep up with inflation, but won’t decline in nominal value either. Its a dead asset supported by the Governmint. Too much is riding on housing to let prices correct. I’m also speculating California will become unsustainable. I recently flew over Lost Angels. It looked bone ass dry to me. It looked baked. I believe we are seeing the beginnings of a mass migration from California and from other socialist states. If your state doesn’t have income tax then you probably know what I’m talking about. I have recently lived in two states that don’t have income taxes and I am seeing plates from Illinois, California, NY, Mass., etc…
    To Dave…Love your site. Sent some bux during your website drive. I check your site multiple times a day. Love the way your mind works. Thanks for sharing.

    Chapwood Index:
    This is from the website: “The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation.” It is, therefore, statistically significant, and it consistently shows price inflation to be much higher than that indicated by the Consumer Price Index (CPI)

    1. Thanks for the feedback Pete. Here’s a link to the Chapwood Index: http://www.chapwoodindex.com/

      Re: Housing. Here’s why housing will deflate. The marginal value of a house is determined by the amount of debt that can be taken out to pay for the house. 93% of all homes sold today are purchased with 0-3.5% down. After all closing and transaction costs, the buyers do not have ANY equity or “skin” in their home.

      Sure, the Govt could print more money to enable more debt to be taken out buy a home, but that will create runaway inflation and the cost of homeownership will exceed most people’s ability to pay for it. We’re in a mini-housing bubble. It’s not like volume is huge. It’s price increases – price increases driven by debt. Even investment buyers are using debt now. See my Seeking Alpha article.

      At some point the supply of homes for sale are going to dwarf the number of buyers or even potential buyers.

      I’m starting to see housing price deflation now in Denver. I’m seeing more and more “new price” signs on top of “for sale” signs, just like I started seeing in 2007. It became an avalanche of “new price” signs by 2008. Wash. Rinse. Repeat.

      1. Hey Dave,
        Thanks for the response. You got me “Sure, the Govt could print more money to enable more debt to be taken out buy a home, but that will create runaway inflation and the cost of homeownership will exceed most people’s ability to pay for it. ” …That is what I believe is happening.

        IMHO Governmint will support housing and not let it drop. They know the consequences, but it’s a can that will be kicked. TPTB make the laws and break the laws, and as a consequence their fiat is dying and that’s why we see high inflation year after year. Hope you are right and a housing correction takes place, as it should. IMHO there will be areas within the nation where housing declines. I suspect the more socialist debt laden states will take a hit and the states that don’t have an income tax such as Florida, Texas, TN, etc..will continue to see housing headed higher. The taxes in socialist states are increasing due to their pension obligations, anything with a pulse gets taxed excessively. That action creates a reaction; such as an exodus of corporations and their employees. California has a huge population and suffers from extreme drought and taxes. Obviously, people will start migrating out of the state. Not to mention Chinese, Japanese, and everyone else that finds settling in the U.S. appealing. Millions of people with big wallets will come here to spend as the Dollar declines. I think the game has changed in a fundamental way. A way we’ve never seen before. Could be a lot of Dollars looking for the right home as a hedge against drought, taxes, and inflation.

        1. History tells us that market interventions ALWAYS fail. The more energy and force thrown into the intervention, the worse the failure. The housing market will experience an epic collapse. CORRECTION: the housing market is in an epic collapse that started in 2005. After this dead-cat bounce fueled by $2 trillion in Fed printing (MBS purchases) the next leg down with be brutal.

          1. Hello Dave, You are of course correct. The housing market will experience an epic collapse. History says so. I guess we will have to see if housing will continue to be denominated in the same Dollars we know today. Example. In Venezuela, the value / cost of housing has reached epic proportions in Bolivares because the Bolivar has been disgraced. It is no longer a trusted currency. I doubt you could even buy a house in Bolivares anymore. However, a house denominated in Dollars has declined significantly over the last few years. People want Dollars as a hedge against inflation (ironic) so that they can immigrate to other Nations with wealth that is fungible. The same house declines against a strong Dollar and is unobtainable in the country’s currency. Did the house decline or increase in value? It all depends on the measuring stick and of course how you derive your living. I just think our stick…the Dollar will be adjusting faster then the house that we are measuring. I am probably 100% wrong, but in any case its interesting to see what is occurring in a place like Venezuela. I see Venezuela as a microcosm of what could occur here.

  6. Hi there. I really enjoy reading your comments about the Denver RE market. I have spoken up here before, but just to reiterate, my husband and I tried to buy a home in Denver last year. With 20% down, good jobs, cash, and good credit, we were approved (of course) but could not find a decent home in the price range we wanted. 300k was our ceiling, and although we could swing to pay more for a house, I really prefer to go simple while we start a family. Of course, we found homes we liked a lot, but the bidding wars are so outrageous that it seems very pointless to keep looking, so we’ve stopped and don’t plan on buying until prices moderate.

    I’m sad because my family is here and I would like to stay close if we have kids. I keep hearing from people that Denver will “never cool off” and “this is the new normal” and I hope they are wrong, because I want to live here. On the other hand, if they’re right, we’ll need to move to another city so that we can have the kind of simpler lifestyle we want. Feeling vexed about moving if the bubble is going to pop here anyway in a few years.

    Very discouraging.

    1. Natalie, the “frenzy” your are seeing is being driven by investors/flippers. I will be writing about this but RealtyTrac published a report that shows that data. Their data is nationwide but the flipping/retail invest to rent dynamic is particularly acute in Denver metro area.

      We are at the tail-end of this mini-bubble in housing in Denver. I’m now seeing home listings below $600k start to hit the market is fairly large quantities.

      I don’t know where you want to live, but I bet you can lock in a really nice longer term rental home in Stapleton or Northfield right now. Wait for the market to come to you. Don’t buy now.

      1. Thanks so much for your insight. I drive around Denver a lot and I see so many apartments being built. It is really hard to believe that all of these buildings will be full of people who are really willing to pay 1.3k for an efficiency and nearly 1.8k for a 1 or 2 bedroom just so they can be close to a bus/light rail/overpriced food establishments/their yoga studio. Do these people put money in their savings accounts? Even in Lakewood and other suburbs, a decent one bedroom starts at 1.2k now. For families and individuals — even dual income — that is a large chunk of change for 700 square feet.

        Last year we had offers on 10 (yes, 10) homes. Our realtor told us that we either needed to “participate in the market by bidding over asking price, or not even bother.” So we decided to give up and I have never felt more content with our decision.

        I will look forward to reading more here. Great comments and insight. Thank you!

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