Home Sales Data Show The Bubble Is Bursting

There’s no question in my mind now that the housing “snowball” has started downhill and it won’t take long to develop into an avalanche. In addition to all of the “for sale” and “for rent” signs I’m seeing with my own eyes popping up around Denver, I’ve been receiving emails from subscribers describing the same thing in their area.Short Seller’s Journal, July 22nd issue

The existing and new home sales reports this week were worse than even I expected.  Given the statistical manipulation tools used by the National Association of Realtors (existing home sales) and the Census Bureau (new home sales) – both entities use the same regression software – one can only wonder about the true rate of home sales decline.

Yesterday, CNBC.com featured a report titled, Southern California home sales crash, a warning sign to the nation.  I was surprised to see CNBC issue a bearish report on anything.  This report is similar to what’s occurring in New York City – rising inventory and falling sales.  Apartment rents in NYC are also dropping.  It’s similar in nearly all “bellwether” markets.

The Housing Bubble Blog (thehousingbubble.com), which was around during the mid-2000’s housing bubble, posted an article on Friday titled, “Discount sales can create a snowball effect.” The article featured articles from different cities, Portland, Dallas, Ft Collins (Colorado) and Minnapolis/St Paul which described rising inventory and falling prices.

This explains why the homebuilder stocks are in an official “bear market,” with some homebuilder stocks down over 30% since late January. I have yet to hear or read about this fact from the mainstream financial media or Wall Street.

Today’s new home sales report, along with the serial decline in the housing starts  data, disproves the “low inventory” narrative.  Affordability, rising rates and a shrinking pool of potential homebuyers who can qualify for a conforming mortgage has torpedoed demand.  The latest U of Michigan Consumer Sentiment report featured this chart on homebuying sentiment:

As you can see, the consumer “sentiment” toward buying a home is at its lowest reading since 2008. This is not a fact that would ever show up in the mainstream financial reporting on the housing market.

As for the low inventory narrative. The California Association of Realtors reported that June existing home sales plunged 7.3% from June 2017 and inventory is up 8.1%. A subscriber of the Short Seller’s Journal showed me an email in which Pulte Homes (PHM) was offering up to an unprecedented $20,000 bonus to realtors who sold Pulte homes in new developments in northern Florida.

Housing starts for June reported last Wednesday came in at 1.17 million (SAAR). The Wall Street brain trust was looking for 1.32 million. This was a 12.3% plunge from May.  May’s original report was revised lower. Starts for both single-family and multi-family homes were down sharply across the entire country. If inventory were “low,” housing starts would be soaring, not falling.

I’m sure northern Florida is not the only market in which Pulte is offering large selling bonuses and I’m sure Pulte is not the only homebuilder offering large broker incentives. I look at the inventory numbers across homebuilders every quarter. A lot of the inventory is “work-in-process.” But finished a new home does not necessarily show up in the MLS system unless the builder lists it. This is why, on the surface, new home inventory might look relatively low but the builders are showing huge inventory levels in their SEC-filed financials.

Because of the nature of the asset, and the relative illiquidity of the market relative to actively traded financial assets, change in the direction of the momentum in the housing market is like turning a large ocean-freighter around. The manic phase of the housing bubble is over. The momentum has been turning in the opposite direction since late 2017. Flippers who bought homes in the last 3-6 months will soon become desperate to sell. Some will look to rent and “wait for the market move through this valley and head up again” only find that rental prices in many areas are now below the cost of carry.  They forget to tell you that part in flipper seminars advertised on local radio stations.

Soon the “discount effect” of falling prices will snowball into an avalanche.  If you think this is wrong, take another look at homebuilder stock charts.  The commentary above is partially excerpted from the latest issue of the Short Seller’s Journal.  In this issue I discuss various strategies for building and managing short  positions in the homebuilder stocks in the context of the homebuilder earnings reports due out tomorrow (Thursday, July 26th).  New subscribers get a handful of back-issues, an option trading primer and a copy of my Amazon Dot Con report.

12 thoughts on “Home Sales Data Show The Bubble Is Bursting

  1. The market still keeps going higher. Trump fixes the tariffs
    with Junker from the E.U. The reality is this entire theatrical
    production with bad actors and a script that should be classified
    as fiction keeps on playing. When do we get to the part where the
    entire scam is exposed like in the Wizard of Oz when Toto pulls the
    curtain to reveal the truth of this scam ?

  2. I haven’t posted here in years but I had to come out of retirement to present to you the ultimate in Irony.

    The building in Staten Island, New York, that was home to SIBOR (Staten Island Board of Realtors) went was up for a Auction Sale last month.

    I think that’s all anybody needs to know about the state of the housing market in New York. Well that and the obscene amount of high-priced condo units coming to market, not just in Brooklyn but on the Jersey Side (Wall Street West as the sheep like to call it).

    It is a powder keg full of cheap, borrowed and/or laundered money that’s ready to blow.

  3. How does Pulte drop on earnings at the open, move sideways for much of the day, and then close the entire gap in the last hour and a half??

      1. Do they – get a good comp and benefits package in that line of work, have good job satisfaction, sleep well at night, love their kids??!!

  4. Wife and I went looking at a new condo complex in West Seattle close to my work… the day we looked (last Saturday) the unit we toured was selling for $618,900 and I got an email today they’d lowered the price $25,000

    At 5% interest with $30,000 down you’d end up paying nearly double over 30 years. Wait for the crash and the fallout incentives.

  5. This week I sold my personal home for 10K over asking in 2 days. Thinking about unloading my rentals as well. This has got to be close to the top, my properties have tripled in value just in 5 years.

    1. That great but you should feel sorry for the idiots who bought from you. You can thank the Fed
      for pumping $2.5 trillion into the housing market for your gains. In fact, you should
      probably snuggle up naked with a picture of Bernanke just out principle.

  6. Haha. Well now I need a new keyboard from spitting my coffee over- and some more printer ink (unrelated). Seriously, I kind of do feel sorry. But you can’t change the mindset of the general public that think “well its cheaper than rent, it’s an investment, or the American dream”. RE agents don’t help either.
    Your research and analysis has helped a lot. As a young subscriber I can least look forward and try not to get trapped by the Fed.

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