RealtyTrac’s data shows that sales of lower priced houses, those most likely to be first-time purchases, have “fallen through the floor. It’s the clearest demonstration of a first-time buyer affordability gap.” And without first-time buyers there will be no buyers able to move to their second home and so on up the tiers. (Link)
Mortgage purchase applications dropped 5% week over week two weeks in a row, for the latest week’s report (Oct 24). Bloomberg was uncharacteristically spin-free in its assessment: The big drop this month in mortgage rates has yet to raise demand for purchase applications which, in the October 24 week, fell a sharp 5.0 percent for the second straight week. And the trend for purchase applications is suddenly moving lower with the year-on-year rate now at minus 15 percent.
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This is particularly bearish for new home sales volume, as 93% of all new home buyers use a mortgage to make their purchase. Confirmation of the adverse affect that the decline in mortgage purchase apps is having on new home sales can be seen in the Las Vegas Region September home sales report. Vegas was one of the biggest bubble markets during the housing bubble and it’s been one of the most bubbly of the markets in the last 18 months. From DataQuick:
Las Vegas-area homes sold at the slowest pace for a September in seven years as the share of homes purchased by investors and other absentee buyers fell to a 69-month low. Last month’s home sales were 15.8 percent below the average number sold during all months of September since 1994…[but] sales of newly built homes were nearly 58 percent below the September average (note: existing home resales were up 5.3%).
For the 9-month period from January to September, total home sales were down 14.5% from the same 9-month period in 2013. It should be noted that these numbers are based on escrow closings. In other words, this data is 100% bona fide. In contrast to this, the National Association of Realtors and the Census Bureau collect data samples. These data samples are then put through a statistical meat grinder – euphemistically referred to as “seasonal adjustments. ” Then this monthly data vomit is converted to an annualized rate.
To compound the problem, the median home price in September dropped 10%. This was the largest one month drop since October 2010 (source: St. Louis Fed):
Low interest rates are not stimulating home sales, especially new home sales. The homebuilders had a sharp short-cover bounce, after hitting a new low for 2014 in mid-October. They had become extremely oversold and I suggested that a quick, violent technical bounce was possible. This bounce occurred largely on light volume. In fact, the DJUSHB finished red today despite the torrid spike higher in the broad stock indices.
It’s time to start aggressively shorting (or adding to shorts) the homebuilders now. I don’t know when the stock market will roll back over, but the homebuilders are going to get spanked, especially as more bearish data like the Vegas data hits the market.
Every one of my homebuilder short-sell ideas are back in play with this latest bounce. If you are looking for short-side alpha or want to make a great bear market play because you understand that the fundamentals have diverged significantly from the absurd level of the stock market, you can access my homebuilder stock reports here: Time To Short The Homebuilders.
This reports contain unique insight and analysis. I cover data and facts that no Wall Street or financial media analyst will touch. That is, if they are even aware of these issues. They probably are not.