A subscriber from Canada emailed me last night about the Canadian housing market: “Toronto and Vancouver sales down 40% and 30% YoY respectively. Prices are still up in Vancouver but down 14% in Toronto. I don’t know how prices stay up if the volume continues to trend down. Canadians are even more levered than Americans I believe. This is going to get ugly before it’s all over.”
The only part I disagree is Canadians being more levered than Americans. The average first time buyer in the U.S. can buy a Fannie/Freddie guaranteed mortgage financed home with zero down as long as the credit score is north of 570. “Zero down?” you ask. Yes zero down. Now included in the down payment is any amount of concessions tossed in by the seller. Soft dollars. Fannie and Freddie are already asking for “bail out” money from the Government after posting big losses. Fannie posted a $6.5 billion loss in Q4. How is that possible if the housing market is healthy? It’s the sign that the average homebuyer is overleveraged.
Now I’m hearing ads all-day long (sports radio) for 100% cash-out refis, home equity loans, purchase and refi mortgages for buyers who don’t even have FICO ratings. “Past bankruptcy” is okay. “Simon Black” (his nom de plume) wrote a piece the other day accusing the bankers of being idiots for letting the subprime debt issuance get out of control again. He’s wrong. It’s the Taxpayers who are idiots for rolling over every time the Government bails out the bankers. Quite frankly, if I lacked morals and ethics, I’d rather be on the bankers’ side of this trade. They make massive bonuses underwriting all of the nuclear waste and then pay themselves even bigger bonuses when the debt blows up and the Taxpayers bail them out. Who’s the “dumb-ass,” Simon?
Homebuilder stocks are a low-risk shorting proposition. A subscriber asked me about the 10yr Treasury yield, which for now appears to be headed lower, and if a significant drop in the 10yr yield would stimulate home sales.
That’s a great question. Mortgage rates are a function, generally, of the 10yr Treasury yield and risk premium. As the risk of repayment increases, mortgage spreads increase. The LIBOR-OIS spread reflects the market’s rising fear of repayment risk. I just noticed that the 30-yr mortgage rate at Wells Fargo – 2nd largest mortgage lender – has not changed much in the last few weeks despite the decline in the 10yr yield.
Part of my argument is that the general credit quality, and ability to make any down payment, in the remaining pool of potential first time buyers is dwindling. In other words a large portion of under 35’s, who make up most of the 1st time buyer cohort and who are in the “pool” of potential homebuyers, do not have the ability financially to support home ownership. In the last 2 months, the percentage of 1st time buyers in the NAR’s existing home sales report has started to decline.
New homes on average are more expensive than existing home resales. This fact makes my argument even more compelling. We saw this in KBH’s FY Q1 2018 numbers, which showed flat home deliveries vs Q1 2017. Homebuilders are also getting squeezed by commodity inflation (lumber and other materials), which lowers gross margins.
I saw a study that showed the annual rate of change in real wages, where “real wages” is calculated using a “real” inflation rate, is declining. Furthermore, most of the nominal wage gains are concentrated in the upper 20% of the workforce. The lower 80% of wage-earners are experiencing year over year declining wage growth.
The conclusion here is that a majority of those in the labor that would like to buy a home can not afford to make the purchase. In fact, a study by ATTOM (a leading housing market data aggregator) showed that the average worker can not afford the median-priced home in 70% of U.S. counties. The relative cost of mortgage interest is only part of this equation, which means lower mortgage rates based on a falling 10yr yield would likely not stimulate home buying at this point.
I think the only factors that can possibly stimulate home sales would be if the Government takes the FNM/FRE down payment requirement to zero and directly subsidizes the interest rate paid. I’d be surprised if either of those two events occur.
P.S. – just for the record, Lennar’s real earnings yesterday were substantially worse than the headline GAAP-manipulated EPS that ignited the rally in the homebuilder sector. I’ll be reviewing LEN’s numbers in Sunday’s Short Seller’s Journal and showing why the reported GAAP numbers were highly deceptive. I’ll also suggest ideas to take advantage of this knowledge.
I can’t believe $LEN is allowed to report the combined 2018 $LEN/$CAA numbers as just $LEN and then show a comparison to just 2017 $LEN comps.
That’s only part of it
The median price of a house in San Francisco is now 1.6mm.
The L.A. market (So.Cal.) is still selling houses for list.
I wonder if that is still overseas money pouring in?
My friend in Beverly Hills tells me that quite a bit of Mid East
money is flowing in. That seems to be supporting the So.Cal
market. Chinese still buying in Bay area and continue to push
prices up. Vancouver situation same as the Bay area.
(Half drunk here so I’m going to rage, but I’m still sober enough to be logical):
HOW the FUCK does, or did, it ever make ANY fucking sense, for a HOME to be regarded as a FUNGIBLE and/or LIQUID financial “ASSET” to be TRADED?
It’s just totally fucked up to treat a “home” as something whose main purpose is to be “traded” rather than loved and lived in and passed on to future generations.
Yeah I know that SOME cultures – and in particular I’m looking at the Eastern European or Russian Empire Jews (and here I claim license to bash Jews as my German Great-Grandfather was one! Although he had the sense and decency to convert to Christianity after he realised that Talumdic Judaism was rotten and irrational and hostile to the rest of the Human Race) – ANYway, as I was saying, in SOME cultures, there is no concept of any stable “home”…
…but in OTHER cultures, home cannot be measured in money! (Neither in fiat NOR in real money!) Such as, for example, around 3,000 years ago when Odysseus was a comfortable guest of the sexy and good-hearted goddess Calypso, although she treated him wonderfully with eternal gifts of material delights AND she offered him immortality, still he chose to go HOME to Ithaca! So he chose mortality for the sake of his love of his home!…
…which he never sold nor flipped! And he returned to it at the cost of death!…
…and so, in closing for now, here’s a wonderful song about Odysseus and love of home! A kind of love that cannot be flipped for any fast profit:
https://www.youtube.com/watch?v=muuiucO_Cog
BUT then, PS to my above comment, now, IN FAIRNESS to MY own kike (sorry I mean my Ashkenazi Turkish/German/Russian JEWISH), my own blood relatives (I mean my second-or-third-or-more Jewish blood cousins in whatever parts of the world they might now reside)…
…I really LOVE THIS wonderful depiction of a TYPICAL London Jewish gangster of the early 20th century, BECAUSE I know that HE WAS A LOT LIKE MY OWN Jewish Great-Grandfather in Berlin around the same time! And so, for this chap’s East End London accent and attitude, just substitute my own Great-Grandfather’s Berlin accent and attitude! And then please enjoy! (And learn a bit too!):
https://www.youtube.com/watch?v=WXKm8Qi-olM
PPS to my two above comments:
Sorry but now I can’t resist adding this historical detail:
https://www.youtube.com/watch?v=eIhPdrZTNYc
http://www.investmentwatchblog.com/ubs-warns-americans-can-no-longer-afford-mobile-homes/
I’m in Toronto and I’ll sell my 93 yr old bungalow, all 700 square feet of it, with an unfinished basement, for only 750k (Canadian dollars). Any takers? I’ll be asking more when the weather gets warmer, so get it now while it’s cheap. Hell, I wish I had sold last Spring, could have gotten a cool million.