We know that housing market is an epic short-sell opportunity: Cramer issued strong buys on three homebuilder stocks last week – just before the homebuilder stock index dropped nearly 10% this week through yesterday. Two of the companies are in my research section, one of them dropped over 5% the day it announced earnings.
Bill Gross thinks German bonds are the short of a lifetime and Larry Fink of Blackrock is worried about market liquidity. I’d be worried about bond market liquidity too if my firm was the largest residential real estate holder in the country. The big investment funds have bought up a large portion of the housing inventory that was created when the housing bubble collapsed and overleveraged homebuyers went bust. But guess what? According to RealtyTrac (no less), 35% of all homeowners still have “effective negative equity” in their homes. What happens when a lot of these people lose their ability to service al l their houshold debt?
As you can see from these two graphs, total household debt is growing at an alarming rate. At some point, households are going to lose their ability to service this debt and will begin to default on their mortgages again en masse.
That’s the contextual backdrop – exclusive to this blog post – for an article that I pubished on Seeking Alpha in which I show that the March existing home sales data was not good, despite the overenthusiastic headline announcement from the National Association of Realtors.
The core, organic homebuyer market continues to fade (1st time homebuyers, move-up buyers). Investment buying continues to fade. These facts are in the data. Q1 2015 home sales volume has been driven by vacation home buying. This is non sustainable and historically is not a meaningful percentage of the total housing market.
You can read my entire article here: March Existing Home Sales: More Sizzle Than Substance.
The homebuilder stocks will prove to be the best sector short play when the current stock bubble blows. The homebuilders are more overvalued now – relative to their underlying financials (record debt, inventory) – than they were at the peak of the bubble. You will make a lot of money shorting the stocks I have presented in my research reports if you are patient and careful managing your positions: Homebuilder Stock Reports.
As an example, two of the homebuilders I cover are either at or below their trading levels when I published on them, despite the rampant stock market bubble and big move higher in the homebuilder stocks so far this year. BOTH of these companies will go bust and I expect that I will never have to cover my shorts. The shares will be cancelled in the eventual reorg or liquidation that I know is coming for these two companies.