Tag Archives: homebuilder stocks

More Evidence The Economy Is Deteriorating

“Financial-market and economic prospects remain far shy of the hype and headlines, amidst tanking consumer optimism and negative revisions to recent reporting.” – John Williams, Shadowstats.com

The economy may seem like it’s doing well if you are part of the upper 10% demographic. Though, in reality, for most of the upper 10%, doing “well” has been a function of having easy access to credit. NASA Federal Credit Union is offering 0% down, 0% mortgage insurance for mortgages up to $2.5 million.

Someone I know suggested the tax cut stimulus had run its course. But the narrative that the tax cuts would stimulate economic activity was pure propaganda. The tax cuts stimulated $1 trillion in expected share buybacks and put more money in the pockets of corporate insiders and billionaires. The average middle class household spent its tax cut money on more expensive gasoline and food. Since the tax cut took effect, auto sales and home sales have declined. Retail sales have been mixed. However, it’s difficult to distinguish between statistical manipulation and inflation. I would argue that, net of real inflation and Census Bureau statistical games, real retail sales have been declining.

As an example, last week Black Box Intelligence released July restaurant sales. While comparable store sales were up 0.54% over July 2017, comparable restaurant traffic was down 1.8%. On a rolling three months, comp sales are up 0.46% but comparable traffic is down nearly 2%. With traffic declining, especially a faster rate relative to the small increase in sales, it means the sales “growth” is entirely a function of price inflation. If Black Box Intelligence could control it’s data for price increases, it would show that there is no question that real sales are declining. I have been loathe to recommend shorting restaurant stocks because, for some reason, the hedge funds love them.

On Wednesday last week, the Government reported July retail sales, which were “up” 0.5% vs June. However, June’s 0.5% “gain” was revised sharply lower to 0.2%. Revising the previous month lower to make the headline number for the reported month appear higher is a mathematical gimmick that the Government uses frequently. As an example of the questionable quality of the retail sales report, the Government reports that sales at motor-vehicle and parts dealers rose 0.2% from June to July. But the auto industry itself reported a 4% decline in sales from June to July. I’ll leave it up to you to decide which report is more reliable…

Housing starts for July, reported last Thursday, showed an 8% decline from June’s number. June’s number was revised lower from the original number reported. No surprise there, at least for me. The report missed the Wall Street brain trust’s expectations by a wide margin for the second month in row. The downward revision to June makes the report even worse. Additionally, housing starts are now down year-over-year for the second month in a row.

This report followed last Wednesday’s mortgage applications report which showed a decline in purchase applications for the 5th week in a row. The housing starts number continues to throw cold water on the “low inventory” narrative. While there still may some areas of housing market strength in the $500,000 and below price bucket, the mortgage purchase applications data has been mostly negative since April, which reflects deteriorating home sales. This reality is “magnified” by the fact that home sales have declining during what should be the strongest seasonal period of the year for home sales.

Lending Tree, Zillow Group and Redfin are “derivatives” of housing market activity. They reflect web searches, foot traffic and sales associated with mortgages and home sales. Lending Tree stock is down nearly 42% late January. Zillow stock is down 26% since mid-June. Redfin is down 39.5% since the beginning of the year, including an 18.5% plunge two weeks ago. unequivocally, these three stocks reflect the popping of the housing bubble. The Short Seller Journal recommended shorting all three of these stocks before their big declines.

Normally I’m hesitant to discuss the regional Fed economic surveys because they are skewed by their expectations/outlook (hope/sentiment) components. However, the Philly Fed survey for August was notable because it reinforced my view that the economy and the “hope” for a better economy is fading quickly. The overall index crashed to 11.9 from 25.7 in July. This is lower than just before the Trump election, when “hope” soared. Wall Street was expecting a 22.5 reading on the index. The new orders, work week and employment components plunged. Shipments dropped, inventories rose and prices paid fell. This report reflects the view that economy is much weaker than is conveyed by the political propaganda coming form DC.

I don’t know what it will take to cause a plunge in the Dow, S&P 500 and Nasdaq but, as we’ve seen with homebuilder stocks, there’s a lot of opportunity to make money on economic reality in the lesser-followed sectors of the stock market.

Myself and my Short Seller’s Journal subscribers have been raking in easy money shorting the homebuilder sector and, of late, Tesla.  I’ve been including detailed analysis of Tesla, why it will likely be out of business within 2 years and ideas for using puts to short the stock.  You can learn more about this newsletter here:  Short Seller’s Journal information.

That egomaniac [Elon Musk] just paid for my new landscaping. LOL! Cashed in on some Jan 2019 100 & 200 puts for a 175% gain. Should be interesting to see how and how long this debacle plays on. – subscriber feedback.

Toll Brothers Stock Jumps On Declining Revenues And Earnings

Toll Brothers reported its Fiscal Q1 earnings this morning.  Year over for the quarter: Revenues declined nearly 1%, operating income plunged 46.8%, net income dropped 4.1%.   Net income was boosted by the reliable accounting management technique of reducing the estimated GAAP “effective” tax rate, which enables any management to goal-seek a specific net income number.  In this case the goal is to “beat” the Street.  Margins were down across the board.

Oh ya, TOL pulled another stunt that homebuilders use to pump up GAAP net income:  it increased the amount of interest it capitalized by $6 million dollars. This has the effect of boosting operating income by $6 million compared to the same quarter last year because it reduces the amount of GAAP interest expense by the amount that was capitalized. It did this despite a drop in sales.   Its net income would have missed the Street by a suburban mile if it had just maintained the same rate of interest expense capitalized.

For this, the stock jumped up 6% this morning at the open.

The Company blamed the drop in operating income and margins on inventory write-downs.  But these have been occurring every quarter recently and will of course continue going forward.  That write-down only explains $4 million of the $44 million plunge in operating income.

There’s so much more going in TOL’s numbers which point to the continued economic deterioration in its business model.  I will be reviewing this further in this week’s issue of the Short Seller’s Journal, including which put options TOL I bought this morning.

Too many layoffs and store closure news to mention but I’ve realized that there are a lot of school-district (including teachers) layoffs and colleges, or even hospitals staff layoffs. CSX just posted 1000 management level position cuts – link.  By the way, thanks for the Short Seller’s journal, very informative. – note yesterday from a subscriber

The Apartment Glut Cometh – Adios Housing Market

Driving by the west-side border of downtown Denver (on I-25), I can count 9 cranes in air plus one semi-finished high-rise building.  What’s amusing about this is that there’s already an oversupply of rental apartments and condos as the 1-2 month free + free parking incentives reflect.   What will happen when all these new projects hit the market?

This is not unique to Denver.   I witnessed it first-hand in New York City over the holidays. Douglas Elliman, the high profile NYC real estate brokerage, issued a report which showed that NYC real estate prices plunged in Q4, with the median sales price dropping nearly 9% from Q3. Days on the market increased 14.6% and the number of sales dropped 3.7% I can recall from the demise of the big housing bubble that the impending housing bust started first in NYC.  I remember walking around NYC in late 2006 and seeing several apartment complexes under construction on which work had been abandoned. I would
suggest that the current bubble is already popping in several bubble areas per this canceled contract data: LINK.  I also am confident that the weakness that is developing in NYC will soon spread to the rest of the country.  – from the  Jan 15th Short Seller’s Journal

Miami was the leading indicator of the demise of the mid-2000’s housing bubble.  An apartment glut quickly appeared as speculators took almost free money and put deposits on apartments being built by reckless builders.  Builders always get reckless when other people’s money is cheap. Greenspan and Bernanke made sure there was plenty of cheap capital for developers.   Wolf Richter details the current apartment market implosion occurring in Miami – LINK – and coming to city near you soon.

Ditto for San Francisco/Bay Area, which was right behind Miami during the big housing bubble and is concomitantly blowing up with Miami.  The SF/Bay Area market was driven by big foreign money laundering and a massive private equity tech bubble in Palo Alto. The foreign money has dried up and the PE tech bubble is fading quickly.  It’s like the cheap money rug has been pulled out from under reckless speculators and developers.  Mark Hanson describes the situation here:  Adios SF Housing Market.

Even some of the industry associations are starting to report the truth -something we’ll NEVER get from the National Association of Realtors, as the National Multifamily Housing Council reported a week ago that, “weaker conditions are evident across all sectors of the apartment industry.”  Its sales volume index dropped for the second quarter in a row.

At the same time that a glut in apartment/condo buildings is appearing everywhere, the luxury high-end market is falling apart as well, the latter of which was also a leading feature of the demise of the big housing bubble. Douglas Elliman reported recently, “that prices in the Hamptons real estate market dropped nearly 30% in Q4, with sales volume down 14.5% But in the luxury end of the market – homes with an average price of $7 million – prices were down 42.6% in Q4. This is an all-out crash in housing in one of the most high-end areas of the country. This is exactly what began occurring in 2006/2007 in the Hamptons.

CNBC reported last week that “luxury home sales continued to slump in Q4.” It cited the
Hamptons but also Aspen and Beverly Hills. I reported in SSJ a few months ago that Aspen
was starting to go into a price freefall. Prices and volume started collapsing in the summer.
Apparently in Q4 sales volume fell another 25% and prices were down another 11%. Beverly Hills sales volume plummeted 33%, though prices were flat. Again, the affects of the bursting big mid-2000’s real estate bubble was first felt in these same markets.

Record low mortgage rates combined with the U.S. Government’s providing the easiest, most accessible borrowing terms and credit standards in the GSE program history has enabled the greatest misallocation of financial resources in history.  It’s been manifest in every asset class but is particularly prevalent in stocks and the housing market.  While it may be somewhat easy to unload stocks when they are dropping out of the sky, housing is a different matter.  It’s easy to sell a home when the buying frenzy is rampant.  But as the market begins to head south, the entire real estate becomes “offered with no bid,” meaning that everyone stuck with an “investment” is looking to dump and buyers scatter like cockroaches when the kitchen light is switched on.

The home construction market is over-ripe with short opportunities.  I have been focusing on the sector (plus retail and autos) in the Short Seller’s Journal.  Since August,  shorting the retailers has been a lay-up.

In the SSJ, I present in detail the ways in which the industry associations, Wall Street – with the help of mainstream media cheerleading – distort the facts about the housing and auto markets.    As the reality of what I described above sinks in to the market, the price path of least resistance for home builders, home construction suppliers and auto-related equities will be down.   The same is true for the companies that provide financing to these industries.

In every issue of the Short Seller’s Journal I provide what I believe somewhat unique market analysis and commentary along with dependable research sources to back-up my assertions.  I also typically provide at least 2 or 3 short ideas, accompanied by suggestions for using options (although I first and foremost recommend shorting stocks outright).  I also disclose when I’m trading an idea presented, including which options contract if applicable.   You can subscribe to the weekly newsletter with this link:  Short Seller’s Journal

You certainly do provide research and with that, Value. But also… YOU actually are there responding to emails which says a TON about you, your commitment to your products, company, and us….the subscribers. For that, I thank you.  – Subscriber, Larry


A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th. 30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:


The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index. I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:


The data is through December 2nd, as mortgage application data lags by a week. As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks. So, if you want to sell mortgage note it is worth doing thorough research before you do.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows. This is not unexpected. Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing. Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop. Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor” that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials. Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept. On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%. – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt and with pay day loans constantly rising, homeownership is becoming a challenge for these people. In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage. This means that more homeowners are looking to loan companies similar to Happy Loan in Calgary for their lending needs. This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago. If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file. I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the mofst widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports). The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable. But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index. I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication. I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites. I also present short-sell ideas, including recommendations for using options. Despite the run-up in the broad market indices, there’s stocks everyday that blow-up. Last Restoration Hardware plunged 18% after reporting its earnings. You can subscribe to the Short Seller’s Journal by clicking on this link: SSJ Subscription. It’s monthly recurring and there is not a minimum number of months required.

The Government’s New Home Sales Report Is Idiotic

Absurd surges in new home sales activity were not significant…Headline reporting of this series is of no substance, as seen frequently with massive, unstable and continuously shifting revisions of recent history… – John Williams, Shadowstats.com on the June report.

Like everything else going on in the financial markets, the Government’s new home sales report is thoroughly inconsistent with all of the actualized supporting data and bears absolutely no resemblance to observable reality.

The Census Bureaus, which is notorious for producing fraudulent data, reports that new homes sales hit a 9-year high in July on a “statistically adjusted, annualized rate” basis. However, it had to revise its original report down for June to 582k from 592k.   Bloomberg theatrically describes the report as indicating “sky high momentum.”  These are, of course, fairytale numbers.

This is how John Williams of Shadow Government Statistics described last month’s new home sales report:    “Despite ‘benchmarking’ to the unstable seasonal-adjustment factors with the April 2016 release, this series remains extraordinarily unstable and consistently unreliable on a near-term month-to-month basis as weather headline sales increased or decreased.”  (Shadowstats.com)

The Government’s numbers were “driven” by an unexplainable 18% surge in new home sales in the South.  Yet, according to Redfin.com’s data for July, homes sales for July in the south’s biggest MSAs (population areas) cratered:   Atlanta -12.9%, Dallas/Ft Worth -13.3%, Miami -24.2%, Orlando -16.1% (LINK).  In other words, the Government’s metric conflicts drastically with observable reality.

Additionally, the new home sales report is entirely at odds with the ongoing economic contraction as reflected in most private-sourced economic reports.  This morning, for instance, the Richmond Fed’s manufacturing index collapsed the most on record (going back to 1993).   Another report on U.S. manufacturing activity released this morning showed continued weakness in the manufacturing sector, with the employment index at its lowest in four months.  If economic activity is contracting and real jobs (not Census Bureau fake jobs) are declining in number, homes are not being purchased.  Again, the new home sales report does not fit the facts.

Finally, in the report it showed that new home inventory is declining.  However, I look at several new homebuilder financial reports every quarter and they all show inventory levels that are ballooning (and being financed with debt).   For instance, Toll Brothers reported this morning (more on that later) and its inventory level of new homes increase 5.3% from the end of last quarter and 6.8% from the end of January.    DR Horton is the country’s largest new homebuilder, its inventory level has soared nearly 10% over the last four quarters.

Also, the same Census Bureau has been reporting well in excess of 1 million supposed housing starts for the last several months.  How is it possible that starts exceed sales by a significant amount and yet inventory is said to be shrinking?  Once again, the facts do not fit the report.

Remember the Redfin.com report referenced above when existing home sales are reported tomorrow. The National Association of Realtors uses the same statistical meat grinder used by the Government in producing its seasonally adjusted annualized fictional account of the housing market.

As far as demand at the lower end of the market, I will republish the market color I received earlier this month from one of my Short Seller Journal subscribers, who has been a real estate professional for over 3 decades:

You are spot-on the housing market. I think the flippers in Denver metro are driving the under $400,000 price to a frenzy and the over $500,000 in the burbs are dropping in price. Some of these flippers have 8-10 houses at the same time. A little jiggle and they will dump. Then the part time rental landlords follow in selling as the rental market gets tough.

The only reason that prices keep rising is because the Fed’s near-ZIRP interest policy and the Government’s sub-prime dressed-in-drag mortgage-lending programs have enabled buyers to pay more than ever for a home and make monthly payments – for now.  As the real economy continues to implode, delinquencies and defaults will pile up as quickly as they did from 2008-2010, led by the flippers reference in the quote above.

“The Big Short:” 2008 Repackaged Into 2016

History, with all her volumes vast, hath but one page.  – Lord Byron

“The Big Short” is a must-see movie.  Adapted from the Michael Lewis’ non-fiction book, “The Big Short: Inside the Doomsday Machine,” it brings to life Walls Street’s fraud-infused world of credit default swaps (CDS) and collateralized debt obligations (CDOs, which were at the center of the collapse of the housing market and the financial system in 2008.

Now that Ben Bernanke has “successfully” saved our system from its demise (sarcasm intended), it’s easy to bury the past and disremember the degree of fraudulence and criminality that had engulfed mortgage and housing markets.   It still blows my mind and angers me to think that people like Angelo Mozilo not only never went to jail, but they were never properly investigated for their role in fomenting the biggest fraud – up to that point in time – in history.

The movie brought back a lot memories for me.  I used to pour through the financials and the footnotes to the financials of several of the mortgage companies and banks that underwrote the bulk of the fraudulent mortgage securities.  I had concluded that all of the big banks plus Countrywide, if forced to mark their mortgage holdings to market or sell them at market, were technically insolvent.   They were all sitting on the ticking time bombs of home equity loans, CDO inventories and the wrong side of credit default swaps (in the movie we meet the people who bet against the mortgage and housing markets by taking the other side of the credit default swaps sold to them by Wall Street).

I remember sending my analysis of JP Morgan, Bank of America and Washington Mutual to several business publication editors and journalists, including Al Lewis (one-time editor of the Denver Post business section,  nationally syndicated journalist and multiple appearances on cable financial news networks), the Wall Street Journal, Bloomberg News and many other publications.  My work, which proved to be correct, was completely ignored.

Ironically, the big housing bubble was not the first appearance of massive mortgage fraud in this country.   When I was a junk bond trader in the 1990’s, there was a mortgage company called Cityscape.   The company had a 12 3/4% coupon junk bond outstanding and I just so happened to be the housing sector trader.   I started examining Cityscape’s financials and business model when the bonds began trading at a discount to par (it’s usually a sign something is wrong when a high coupon, senior secured bond begins to trade at a  high double-digit yield to maturity).    I remember uncovering the same type of fraud with Cityscape that became accepted standard business practice with Countrywide, Wash Mutual, Merrill, Lehman, etc.

Unfortunately, underpinning what has been craftily marketed to the public as a housing “recovery” is nothing more than an “echo” housing bubble inflated by an “echo” mortgage bubble.  The blatant disregard for the assessment of credit worthiness, and the financial fraud embedded in the mortgage underwriting process, that occurred during the big bubble years was never fully cleaned up – it was merely covered up.

The term “subprime” has been erased from the mortgage credit assessment lexicon and, instead, replaced with terms like “3% down payment borrower.”  The U.S. Government, via Fannie Mae, Freddie Mac and the FHA is now guaranteeing mortgages with effective negative equity in them at closing.  Buyers can use borrowed cash and/or seller non-cash “give-backs” in lieu of a bona fide down payment.  There are now private funds which underwrite even riskier mortgages, which now include interest-only and adjustable rate options.

Just like the first time around, many of these mortgages end up in “collateralized” investment trusts.  Now they are called “bespoke opportunity tranches” instead of CDO’s. Not only that, several big brokerage firms, like Merrill Lynch, underwrite mortgages which use the margin equity in the homebuyer’s stock account as the down payment.  Imagine what will happen to these mortgages when the stock market finally cracks.

The homebuilders themselves are offering 0% down payment financing as part of the incentive package being used to entice buyers.   Many of these mortgages will be sold off to Wall Street, which will repackage them into higher yielding investment trusts and derivatives cesspools.  The criminal banks will re-market them with fat commissions to yield-starved pension funds and high net worth stool pigeons.

Those who do not remember the past are condemned to repeat it  –  George Santayana.

Wash, rinse, repeat.  Just like the big housing/mortgage bubble, the current echo bubble is sitting on top of a foundation of financial dynamite.  The fuses have been lit.  It’s not a question of “if” but of “when” the bombs will detonate.

Perhaps one of the finest directorial features of “The Big Short” was watching the players who made huge bets against Wall Street as they waited in a state of torture for the mortgage market to collapse while Wall Street’s web of fraud, market manipulation and propaganda was used to hold up the mortgage market.   Sound familiar?  The movie skillfully weaves in the fact that Wall Street fraudulently mis-marks the securities it creates in order to fleece investors on both sides of a trade AND to keep its own balance sheets fraudulently marked too high.

I witnessed this dynamic first-hand in 1990’s. If you think Congressional reform “fixed” this problem, you better review what is happening currently in the junk bond market.   Bonds marked in the 90’s are all of a sudden trading in the 20’s.  This occurrence will not be confined to the triple-C and single-B segments of the corporate bond market.   At some point in the near future this will be a standard feature in the mortgage bond market – just like in 2008.   And as the rug is pulled out from under the mortgage market…

New Home Sales Miss Expectations – Government Data Is Useless

Housing has been converted into a financial “asset” because the value of a house, and the ability to buy a house, has been irrevocably predicated on the amount of debt the buyer of the home is able to assume in order to pay for the house.  The housing bubble is more dangerous than the stock bubble.  Underneath it all is a catastrophic level of debt.  The middle class will not survive the next housing downturn, which has already started.  – Investment Research Dynamics/Kranzler Research

The Government’s Census Bureau reported new home sales for November.  The reported number – 490k seasonally adjusted, annualized rate (SAAR) – was a 20k increase over the October number.  There’s just one problem:  October’s number was originally reported to be 495k but was revised down 470k.  In fact, the Census Bureau has revised down its reported results for the last five months.  For the record, the November number – whatever it really may be – missed the Wall Street brain trust consensus estimate of 500k.

By the way, the downward revisions for September and August were not insignificant. September was revised lower by 26k (468k down to 442k) and August was revised lower by 27k (529k to 507k).

I’m not going to dissect the details of the report simply because the report itself is a complete statistical abortion.  You can examine the report yourself if you want to subject yourself to statistical torture:  Alleged New Home Sales For November.

To give you an example of the insanity behind the data, let’s examine the October to November comparison.  The Government originally stated that there were 495k SAAR new homes sold in October.  That number was revised down by 5.1% to 470k.  The Government is telling us now that 490k new homes SAAR were sold in November.

How reliable is this number?  In the report the Government shows a “90% confidence interval” for its guesstimate.  This interval defines the upper and lower bound within which the Government guesstimators are 90% confident that their number would fall.  For the Oct to Nov comparison, the 90% confidence interval for the 4.3% increase over the revised October number is +/- 12%.  The Government is telling us that there’s a 90% chance that new homes sales were down as much as 7.7% or up as much as 16.3%.  “Oh, by the way, we will probably be revising November’s number down next month so you’re better of off just ignoring these results.”  (That last sentence was editorial addition).

But wait, it gets better.  For the west region, the Government is reporting that new home sales jumped 20.5% from October.  The 90% confidence interval is +/- 27%.  In other words, the Government is 90% confident that the number of new homes SAAR sold in November in the west was somewhere between down 6.5% and up 47.5%.   The Government might as well just state that it is 100% confident that the real rate of increase in new home sales number for November over October in the west was somewhere between -100% and +100%.

The irony of this whole analysis is that, in all likelihood, when December’s number is reported a month from now, there’s a high probability that November’s reported number will be revised lower.  To say this is “insane” is an gross understatement of the definition of “insanity.”  The bottom line is that the Government’s new home sales report is completely useless and meaningless.

On the other hand, this is an exceptional opportunity to make money in the homebuilder sector.  Homebuilder stocks are more overvalued now than they were at the peak of the housing bubble in 2005.   My Short Seller’s Journal report this week featured a homebuilder that has been posting unit sales declines this year and which I believe will drop at least 40% by June (unless of course the Fed can continue successfully keeping the stock bubble inflated).   The first week’s report featured an manufacturing company that relies on sales to new homebuilders.  It also relies heavily on international sales, which will evaporate along with the global economy – just ask Caterpillar…

This week’s report also includes a “stocking stuffer” – you can subscribe by clicking here: SHORT SELLER’S JOURNAL.


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.

Retail Sales Are Crashing – Housing Sales Are Next

Flippers are getting stuck with houses they can’t flip for a profit. Hedge funds have stopped buying and have begun selling. Anyone dumb enough to have been lured into this market in the last few years will be underwater in no time. The foreclosure train will be leaving the station shortly. We’ve been here before. It was ten years ago. Some people never learn.  – The Burning Platform

Last week in the stock market featured several “cliff-dive” drops in retail stocks:  Macy’s, Nordstroms, Advance Auto Parts.  The middle class (yes, “middle class” includes the wannabees living beyond their means in million-dollar “mcmansions”) is tapped out of disposable income and has run up against is ability to take on more debt.   The Nordstrom’s report is what has really freaked out economic analysts:  LINK.

The housing market will show the affects of a rapidly deteriorating economy next.   I noticed something had changed in the housing market in mid-summer based on all of the available data I analyze.  Interestingly, the CEO of Redfin agrees with me:  Something We’ve Seen In The Last Month Should Make You Worried About The Housing Market.

I noticed that the number of listings all around Denver began to increase rapidly.  The NAR’s manipulated “months supply” metric is lagged by a few months and does not pick up big increases in listings right away.  I  noticed this especially in the higher-end areas all around Denver.  My observations have been confirmed in San Francisco:   LINK and in New York:   LINK and NYC/Washington DC:  LINK.

The small bump up in home sales that resulted from Fannie Mae and Freddie Mac lowering their down payment requirement from 5% to 3%  has now run its course.  It’s pulled sales forward and coerced a lot of people to overpay for a home – most of them are households that, over the long term, can not afford the monthly cost of homeownership.   Anyone who bought a home within the last 6 months in almost every major city and used a 10% or less down payment is now underwater vs. their mortgage.  Many are now starting to realize this which is part of the reason retail sales are tanking.

The homebuilder stocks are now more overvalued than they were at the peak of the housing bubble – using ANY financial metric.   What’s different is that the Fed is now out artificial fuel to power the next phony housing “recovery.”  The homebuilder stock are set up for a spectacular drop.

My two most recent reports are being offered for a short period of time in a two-report special price.  Each report is $30 or you can buy both reports for $45:    Two Homebuilder Stock Report Special

Note:  If you have purchased either the Low End Homebuilder report or the Red Flag Alert report, please contact me if you are interested in adding the other report for $15.

One more point of note:  DO NOT overlook or underestimate the fact that big homebuilders like Lennar are now offering ZERO-DOWN mortgage financing in many of their new home communities.  Lennar is not the only homebuilder offering mortgage incentives to move homes.  Many homebuilders are now showing a big increase in “mortgages held for sale.”  These are mortgages that can not be off-loaded on to the taxpayer because they are subprime quality.   The homebuilders are stuffed to the gills with inventory right now.  

A Bearish Warning From The Pending Home Sales Report

The warning signals are coming from several sources now.   Many major MSA’s have gone from apartment rental shortages to oversupply with more supply on the way;  Sam Zell recently unloaded a big chunk of apartments from his flagship REIT – a repeat of a  move he made in 2007;  housing prices have been dropping for the better part of the last year in several MSAs – 30% All Homes Lost Value Last Year;  large investment funds are now starting to  unload large portfolios of homes that had been  structured for  high yields from rents but have significantly underperfomed.

The crux of the problem is that the Fed’s massive stimulus of the mortgage market, combined with increased Government subsidization of FNM/FRE/FHA mortgage programs, accomplished no more than temporarily stimulating a small bounce in homebuying.  But a large portion of this homebuying was done by “investors” and flippers.  That ship has sailed as housing prices, contrary to the calculus reported by the Case-Shiller index (which Robert Shiller has admitted in the past is flawed) have been declining in most cities since the spring.  Flippers are now finding themselves stuck on homes that they are unable to flip unless they are willing to eat loss.

I explore the significance of the latest Pending Home Sales Index report, which has now declined in 3 or the last 4 months in this Seeking Alpha article:  Pending Home Sale Indicating The Bear Is Back.    This is true despite the fact that the Government just allocated more taxpayer support by rolling out  a zero-down mortgage program for the low-income demographic.   As I discuss in this article, mortgage subsidies won’t help a population that can’t earn enough income to support the monthly cost  of home ownership.

I have published a new homebuilder report which shows why this particular homebuilder is going to get cut in half in price over the next year.  This company happens to focus on the lower-end homebuying demographic and it recently reported a continued decline in unit sales.   This stock fell 9% after it reported and it has yet to rally back to its pre-earnings level despite the massive move up in the S&P 500.

You can access this report here:  HOMEBUILDER REPORTS

In response to several recent inquiries, I’m offering a package of my older homebuilder reports at a discount.  The numbers in the report are dated but the primary premise explaining why each homebuilder is a great short is still intact.  In fact, two of the companies are now well below their stock price when I published the reports, despite the fact that the S&P 500 is significantly higher than when the reports were published.  There’s a message there…

I am offering the older reports at a discount until I get the numbers up-to-date, which  I will be doing over the next couple of weeks.  Anyone who buys these reports will be entitled to receive future updates per my report buying policy.  If you are interested, contact me at investmentresearchdynamics@gmail.com