November Existing Home Sales Plunge

Something we’ve seen in just the last month should make you worried about the housing market.Redfin CEO on Bloomberg, August 5, 2015

November existing home sales, according to the National Association of Realtors, plunged 10.5% from October to November.  Note that this metric, as calculated, is the NAR’s “seasonally adjusted, annualized rate (SAAR)” metric.  The point here is that the plunge in sales can’t be blamed on seasonality or the weather.

I have been showing in detail in previous posts on this blog that the NAR’s SAAR metric is more than likely overstating the actual number of sales.  Please see previous posts for details.   You can examine this month’s report here:  Nov existing home sales.

Incidentally, one of the trading ideas in my Short Seller’s Journal weekly report this week details a homebuilder short sell idea and it includes a copy of one of my recent homebuilder reports.  Subscribers received this on Sunday evening.  You can subscribe to my weekly report here:  SHORT SELLER’S JOURNAL.  The other weekly idea suggests a way to short the bond market, especially the demise of the corporate bond market.

A look beneath the headline report reveals that November’s existing home sales report is worse than reflected in the headlines.   The NAR chief economist, Larry Yun, is claiming that the “Know Before You Owe” (KYBO) initiative implemented by Consumer Financial Protection Bureau on October 3 is one of the primary causes for the drop in November sales. However, as is typical of Yun’s apologies for disappointing sales reports, his explanation is unequivocally wrong, if not an intentional lie.

The KBYO rules do nothing more than make it easier to understand the costs involved with financing a home with a mortgage.  Buyers get a disclosure statement three days before closing and, theoretically, can walk away if they can prove they were misled.  In fact, this law will do little if anything to discourage most, if not all, buyers.  Most of them are basing their decision to buy on the availability of 0-3% down payments and record low mortgage rates.

However, November existing sales are based on closings.  it typically takes 30-45 days to close a signed contract.   This means that homes closed in November were based on contracts signed in mid-September to mid-October.  “Enterprising” real estate brokers would use the “threat” of the KBYO event as a selling tool to herd buyers into signing by October 2.  If anything, November sales (closings) should have been boosted by this.

In addition, the reported result for November missed the  Wall Street “brain trust” consensus estimate by 10.5%.  If the KBYO event was at all going to affect November home sales, doesn’t it seem highly likely that Wall Street professionals would have factored this into their estimates?  Wall Street analysts like to appear intelligent and they also like to set the bar slightly low.  A 10.5% forecasting miss is a disaster.   But it also reflects the fact that market’s expectations for the housing market are exceedingly wrong.

This housing market is set up to crash.  We are seeing the same things going on in the mortgage market as we saw in the housing bubble years.  –  South Florida mortgage processor

Furthermore, everyone was aware that the Fed might raise interest rates in December. This is another event that our “enterprising” house salesmen would have been pushing hard in order to “incentivize” prospective buyers into signing contracts “before rates go up.”  I’m still hearing mortgage ads continuously on the radio from mortgage brokers making this pitch. This too should have boosted the number of homes that closed in November, ahead of “rates going up.”  It seems that a pre-interest hike rush to close a mortgage did not occur.

Finally, Larry Yun has been making the case since early this year that “low inventory” is affecting the rate of home sales.  Once again this pathetic apology ignores the long history of data which shows the contrary.   The historical data shows that there is an inverse correlation between the level of inventory and the rate of home sales. In other word, lower inventory stimulates a high rate of salesUntitled and vice versa.  I detailed this fact in this Seeking Alpha article:  LINK.   Here’s the Cliff’s Notes graph (click to enlarge):

I’d love to hear Larry’s response to this indisputable data from the St. Louis Fed’s website.  Having said that, the inventory level in November jumped up to 6.3% to its second highest level of the year.  Larry will have to fumble around for another excuse next month.

I have been writing about the fact that I’ve been seeing a literal flood of listings hit the market since the late summer all over metro Denver.   In fact, the high end of the market – i.e. over $800k – was being flooded with listings since the spring.   In some high end areas the number of “for sale” signs is jaw-dropping.  The “new price” signs on top of “for sale” signs are raining down hard now as well.   Moreover, the amount of listings in the $300k-$750k is has been rising rapidly since October.

I mention this because Denver was one of the first big cities to see the bubble pop the first time around.  In housing, market trends typically hit Denver before the rest of the country. This occurrence goes back to at least the late 1970’s when Denver housing was hit by the oil bust back then.

What I’ve been seeing since the late spring this year is nearly identical to what I was seeing all over Denver in 2006/2007.  In fact, the number of “for rent” signs in front of homes is significantly higher now than back then.  This tells me that there’s a lot of “investors” and “flippers” who are stuck – they can’t unload the home they bought in the spring unless they are willing to take a hit so they try to rent it out to cover their monthly expenses. Given that a glut has formed in the Denver apartment market, there are going to be a lot of unhappy home traders by early 2016 – just like the first time around 9 years ago.

I believe that it is highly likely that 2016 will be a very difficult year for the housing market. Having said that, I am expecting the new home sales report for November to beat market expectations.  I say this because the two series – new and existing home sales – seem to be on a schedule in which one misses big and the other beats big.  They reverse roles the next month.  This “strange” occurrence has been going on since the spring.    But this won’t change the underlying reality, which is that the same middle class income dynamic that is driving retail sales into the ground will soon be driving home sales into the ground.

7 thoughts on “November Existing Home Sales Plunge

  1. Although I’m tempted to say everything is repeating exactly as it transpired back in 2005-2008, there is one element that is different today. My colleague pointed this out to me the other day and I didn’t have a good response. Prior to the crash, the only criteria to qualify for a loan was to breathe and walk. Yes, I am totally exaggerating but the point is that the qualification standards back in 2005-2008 were a complete joke; basically anyone qualified. In today’s world, you have the 0-3% down mortgage loan which is pretty much the same prior to the crash, but there are much heavier qualification standards i.e., length of employment, income verification, bank statements, etc. So even if the housing market does turn south, I’m left wondering if it will be as bad as people say it is. The folks that are living pay check to pay check will be the first to walk, but that doesn’t necessarily include all home owners that bought a home in the past few years. Now don’t get me wrong; I personally sold my rental house early this year and moved to cash and gold. I would love to see housing prices dip lower so that I can pick up a property, all cash. But it’s hard to see prices crash by 20-40% during the next bubble pop, especially here in Southern California, Irvine. I am curious to get your thoughts on this, thanks for all you do, Dave!

    1. Ummm, actually getting a mortgage is as easy as it was in 2004-2007 – it’s manifest in a different manner now than it was back then. And in fact, if you include the fact that a 0-3% down payment buyer can use gifted money or now, after the latest new product rolled out by FNM and FRE, “community loans” to make the down payment, many buyers in effect are well over 100% financing and have none of their own equity in the house. Not quite as extreme as the big bubble, but it getting close. Also, buyers can get easy money financing with credit scores below 600.

      The same bullshit is occurring now, just in different form: old wine, new bottle as my English major advisor used to say.

      Layer on top of that the auto loan disaster that’s brewing and the debt + fraud component is just as bad if not worse than it was in the big bubble years. One more point: there are now several private, non-bank lenders are making highly reckless mortgage loans and selling them off into securitized trusts. In fact, some of these private companies were founded by ex-Countrywide and Wash Mutual executives.

      Tell your friend to stick all that in his pipe and smoke it.

      1. P.S. – in the near future I will be featuring some of these non-bank banks in my Short Seller’s Journal. They will meet the same fate as Countrywide et al…

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