Tag Archives: homebuilder stocks

Homebuilders Were Ripped Lower – Again

In an acknowledgement of how insanely overvalued the homebuilders are, the Dow Jones Home Construction index is down another 3.5% today. It’s down 5% from last Friday’s close, despite all the “good news” about the economy this week:

Homebuilder Stocks

The catalyst today was bit surprising. Meritage, a somewhat smallish homebuilder missed its net income bogey. I guess the fact that it guided well below what the snake-oil salesmen on Wall Street were pimping is what has undermined this stock, which is down 9% today. But it’s an insignificant factor in the Dow Jones Home Construction index.

This tells me that the market is starting to unload the homebuilders on any scrap of not-positive news. The hedge funds are substantially overweighted in this sector, as the homebuilders have been short-squeeze momentum darlings for quite some time.

Crispin Odey was in Zerohedge earlier this week  LINK  bragging about being short the stock market.  Ironically, the homebuilders are one of his largest long positions. His shorts will be more than offset by the huge beating he is going in incur from being long homebuilders.

The homebuilders are more overvalued now than they were at the peak of the housing bubble. I have several research reports which show in detail why these builders are all going below $10, many below $5, and some will hit the wall and disappear. I am offering my older reports for a package price, but as soon as earnings season over over I will be updating all of them and raising the price.   HOMEBUILDER REPORTS

If you are interested in purchasing my homebuilder reports in a package deal, contact me at this email address: investmentresearchdynamics@gmail.com LINK.   Anyone who has purchased my reports is entitled to receive the updates as part of the purchase price.

September New Homes Dropped More Than Was Reported

Note:  I had an issue with my domain registration which disrupted access to my site for part of the day on Tuesday.  Everything should be cleared up and I seem to be running faster than before.  If you have trouble loading this site, try clearing out your browser cache.

After tearing apart the Census Bureau’s new home sales report for September yesterday, there is no doubt in my mind that the actual number of new home sales for the month of September was significantly lower than was reported in the Census Bureau’s seasonally adjusted annualized rate metric that is reported in the headlines.

If you look at the unadjusted monthly number reported that is in the report but not reported, new home sales plunged 16% from August to September.  Seasonality?  No.  I looked at the data for the previous three years for August and September, which is available on the CB’s website, and there is no seasonal affect that shows up in the data.  In fact, new home sales increased by small amount from August to September last year.

I have written a detail analysis of my findings in this Seeking Alpha article:  September New Home Sales Fell More Than Reported.   

Unless the Fed and the Government re-up another round of what will have to be massive monetary stimulus and taxpayer subsidy of home purchases by a people who can’t afford to support the monthly cost of home ownership, the housing market is headed back into the vicious bear market that began when the housing bubble popped but was kicked down the road by the Fed and the Government.

My latest homebuilder report highlights a homebuilder that will have its stock price more than cut in half as this scenario unfolds.  In addition to a litany of red flags throughout its financials, it is being investigated by the IRS:   Red-Flag Alert Homebuilder  The stock is already down over 5% from when I published the report last week.

zero money down

September New Home Sales Plunge Nearly 100k From The Original August Report

The stock market remains a real insult to human intelligence.  – John Embry

I’m right about the housing market and I’m right about Amazon.com. The only factor I can’t control is the amount of fraud and corruption that is being engineered by Wall Street in conjunction with the Government in order to try and make it look like the reality that analysts like me report is wrong.

August new home sales were reported originally at a 552k annualized rate. The “annualized rate” format is important to understand because it magnifies any estimation and “adjustment” (i.e. manipulative) errors by a factor of twelve (12x). Here is the original Wall St. Journal headline announcing the “good” news from August: “U.S. New-Home Sales Up 5.7% in August – Single-family home sales rise to new post recession high.” Don’t forget, the market trades off of this headline.

This morning the Census Bureau reported that September’s seasonally adjusted, annualized rate of sales had plummeted to 468k, or nearly 100k from the original August report. But the CB decided that it’s original estimate for August was off by 22k, or 4%. Thus, the media is reporting an 11.5% drop in home sales from August for September. However, the September report is 15% below the original estimate for August – the number which the market originally incorporated into its trading models. The 468k missed Wall Street’s consensus estimate of 549k.

Regardless of what the propaganda laced media is reporting, the housing market is starting to drop quickly. Price does not reflect supply/demand, it reflects rampant inflation that is being manifest in insane degrees of debt-financing which enable homebuilders to raise prices because the amount someone pays who is dumb enough to buy a new home is now a function of how much monthly payment they can afford.

This is why we are now seeing this:

zero money downThat sign is not the the type of promotion you would see in a market in which supply is limited and demand is strong. That is the unmistakable indicator of a homebuilder desperate to unload inventory.

The homebuilders are insanely overvalued relative to their underlying fundamentals, especially debt and inventory levels, which are higher now relative to sales than they were at the peak of the housing bubble.   Furthermore, all of these homebuilders are generating highly negative cash flow from their operations because they are overbuilding inventory to an extreme degree.

I just published a new report on a homebuilder (Homebuilder Reports) that is loaded with red flags, including an ongoing audit by the IRS.  The drop in this homebuilder is just getting started.  In fact, it will soon have a graph that will look like this, which is another homebuilder that I recommended shorting when it was in the low $20’s about a year ago:

This is what the graphs of almost all of the homebuilders will look like, only they will notUntitled
experience the temporary price recovery you see in the graph of this stock.  The price recovery 100% a function of the Fed’s interminable support of the S&P 500.  With Thanksgiving around the corner, a lot of these homebuilders will soon have graphs that look like “turkey shoots.”

 

Pulte Home (PHM) Is Down 9% Today

The National Association of Realtors served up a big bag of statistically manipulated smelly brown stuff today.  My research has shown that there is not a big seasonal difference between August and September in terms of home sales.  The NAR turned a 6.5% not seasonally adjusted plunge from August to September into 4.7% “statistically adjusted, annualized rate” pile of defecation.

But the “tale of the tape” is Pulte’s 6% drop in home closings and the 9% drop in its stock.  In fact, the Dow Jones Home Construction Index is down 2% despite a 300 point ramp in the Dow.  My report details why there’s easily another 10 points of downside unless the Fed runs the stock market to Pluto.

Anyone who bought my latest research report is now 9% richer if they acted on the information I provided yesterday.  Near-money, October puts are up 100%.

I will have a detailed analysis of the NAR’s existing home sales tragicomedy later this week.

[Please note:  Five of my homebuilder stock reports have not been updated with recent earnings for quite some time.   The date listed above each report is the date of the last update.  I am offering these reports at a discount if you purchase multiple reports.  Anyone who buys my reports can receive updates as part of the price of my reports.  Please contact me at this EMAIL address if you are interested in all of my reports.  Once I update them with current financials. they will only be available at full price]

 

The “Low Housing Inventory” Myth

Every month the chief “economist” of the National Association – Larry Yun – remarks that “low inventory” is hampering home sales.  But of course no one questions this premise – except for me.

As it turns out, if you examine the historical data in order to question the NAR’s assertions, the facts show that since 1999 – which is when the Fed began tracking existing home sales – relative inventory levels do not drive home sales:

homesales1

In fact – if anything – there is an inverse correlation between inventory levels and home sales. In other words, since 1999, homes sales rise when inventories are low!

It blows my mind that everyone just accepts the NAR propaganda drooled out by its chief snake oil salesman.   I take a sledgehammer hammer to this idea that low inventory levels are holding back home sales in this Seeking Alpha article:   The Low Housing Inventory Myth.

Based on what I’m observing in the metro-Denver market – one of the previously hottest markets in the country – and based on reader reports from other metro areas around the country, it would appear that home listings are beginning rise quickly.  But what’s wrong with this picture?   Inventories are going up as we enter the slowest seasonal period of the year.   Either  sellers are all rushing to try and unload their overvalued home or many of them are trying to get out of a home that is unaffordable.

Certainly this visual, which is become prevalent all throughout the metro-Denver market, smells a little bit like desperation:

PriceReduced

New Homes Sales For July: Full Of Hype But Lacked Substance

As usual, the headline monthly and annual changes in new-home sales were not statistically significant…While the headline July 2015 sales level of an annualized 507,000 units (42,250 monthly rate as used in the graphs) was up versus June, it was below the levels of activity in April and May 2015, and it still was down by 63% (-63%) from the pre-recession peak for the series.  With the otherwise meaningless monthly swings in these numbers smoothed out, new-home sales activity continued in a broad pattern of low-level stagnation.  – John Williams, Shadowstats.com

New home sales for July missed Wall Street’s consensus guesstimate, coming in a 507k vs. 516k expected.  This number is not a real number, as it is based on sketchy Census Bureau date collection methods and questionable “seasonal adjustments.”  The CB then takes this cesspool and turns it into an annualized rate.

I wrote an article for Seeking Alpha which dives into the details of the report and shows why numbers are highly unreliable.  You read this article here:   July New Home Sales

Hedge funds have taken excessively large positions in the homebuilder stocks.  The question is, who will be there buy those positions when the hedge fund operators all rush for the exits at once when they realize that housing market is rolling over in a big way?

Reckless and fraudulent mortgage underwriters were one of the primary cause of the housing bubble that popped in 2005/2006.   This bubble never finished deflating.  The Fed’s zero interest rate policly and close to $2 trillion injected directly into the housing market has cause an extraordinary degree of overbuilding.

Homebuilder inventories and debt levels are now higher than they were at the bubble’s peak.  The muppets on CNBC, Bloomberg and Fox Biz have been furiously hyping the housing market.  This is a bad sign.

Homebuilder stocks are now several multiples more overvalued relative to their underlying fundamentals than they were in 2005, when they peaked in price.  There is a lot of money to be made shorting the homebuilder stocks ahead of the inevitable rush for the exits by institutional investors. My homebuilder reports explain why and how.  You can access them here:   HOMEBUILDER RESEARCH REPORTS

Once I update them, I’ll be raising the price.

I made $600 on a $1,060 investment selling (short) a BZH calls a few weeks ago because I read your reports on these companies

 

 

New Home Sales For May: Statistical Measurement Failure

The Government’s Census Bureau reported new construction home sales for May today. Supposedly new homes sold at a 2.2% higher rate in May than in April.  However, notwithstanding the fact that the Census Bureau has already been tagged for reporting fraudulent data, the supposed seasonally adjusted annualized rate for new home sales in May was driven by a supposed 87.5% jump in new homes sold in the northeast vs. April.  Click to enlarge:

new home sales may

What the headlines do not report is that the statistical margin of error at the 90% confidence level was plus or minus (+/-) 77.1%.   This is the epitome of statistical measurement failure and it leads one to question the veracity of any of the Census Bureau’s economic reports.  

Anyone who took statistics and econometrics in either undegrad or business school (or both, as was the case with me) knows that if you had turned in a data measurement and forecasting project with a margin of error of 77% at the 90% confidence level you would have received an “F.”

When a flawed statistic for one month is converted into an “annualized rate,” it compounds the error and produces an “annualized rate” that is not even remotely representative of the reality that statistical sample is supposed to represent.  This is clearly the case with this latest new home sales report.

Another huge flaw in the Census Bureau’s methodology is that in areas in which it was unable to get data from homebuilders on new contracts signed during a reporting period – remember:  new home sales are based on contracts signed, not closings – it uses the number produced for housing starts to estimate the number of sales in that area (this fact is on Census Bureau’s  website).  This in and of itself is highly flawed.  In no remote way does a housing “start” necessarily translate into an actual sales closings.  “Starts” are always running at a measured rate that is significantly higher than actual sales.

The reporting and accounting fraud that has become so pervasive in our economic and political system has particularly affected reports in the housing sector.  This is because this highly questionable data purporting to show a picture of a recovering economy is about the last area which the propagandists and snakeoil salesmen can use to promote their agenda.

Welcome To Housing Bubble 2.0

However, this is the same movie that was playing in 2005, including and especially the statements issued by both the National Association of Realtors and CNBC that the soaring home prices were not indicative of a bubble:  CNBC/Larry Yun (NAR chief economist).

The advent of 0-3% down payments and calculating the price to pay for a home based on the monthly payment one can afford has temporarily “financialized” homes.  In other words, home sales and prices and become a function of the cost and availability of the amount of financial paper required to affect a home sales transaction.

The cost of the paper is close to zero now.  The availability of paper needed to make a sale happen is entirely a function of the close to $2 trillion the Fed has printed and injected into the mortgage market.

Home values and monthly payments are quickly dislocating by a significant amount from the underlying fundamental ability of the middle class to support.  There’s no better evidence of this than the fact that the current loan value of mortgages issued by Fannie Mae is an an all-time high – higher than at the peak of the big housing bubble:

Fannie Loan To Value

The same report that produced this data also shows a significant deterioration in the average of FICO score of the average Fannie Mae borrower.   Escalating prices, escalating debt, declining loan quality – they all add up to one huge housing market bubble that has been blown by Bernanke and Yellen.

This is going to end up with a worse outcome than occurred in the 2005-2009 period.  Back then interest rates were significantly higher and the Fed was able to contain the damage by taking rates to zero and printing trillions.  Those “weapons” to combat bubble deflation are no longer available (although I would bet we’ll see a lot more printing).

As the housing market stalls out and begins to fall, the absence of true underlying fundamentals will cause a vacuum and induce a plunge that will be significantly worse than what occurred the last time around.   Do your best to stay out of the way.

Housing Starts Plunge – Apartment Building Bubble Is Popping

Every new apartment building in Denver is now offering one month free as a move-in incentive; some buildings will give you two months free if you push them. There are at least 12 new big buildings in central Denver in various stages of construction. – Investment Research Dynamics

Housing starts plunged 11% in May LINK.  Ironically, this comes a day after the National Home Building Associating reported huge jump in homebuilder “sentiment.”  Let’s remember, “hope” is not a valid investment strategy.

This housing starts number is about as bearish as it can get for the new construction market.  It is also consistent with my detailed research which shows that homebuilder companies have accumulated an all-time high level of inventory, despite a unit sales run-rate which is about 60% below the previous all-time high in inventory back in 2005:

HousingSentimentAs you can see from this graph to the left which shows homebuilder “sentiment,” industry “hope” has perilously disconnected from the reality of sales. Today’s housing starts report is consistent with the actual transaction data. Since when has a business – other than tele-evangelists – ever been able to convert “hope” into cash flow?

The Orwellian financial media is going to focus on the “housing permits” number.  But, to begin with, the filing of building permit is not a valid economic metric.  It costs next to nothing to file a permit and the act of filing for a permit merely gives a builder the right to build.  Second, and more important, the large jump in permits was for mult-family units:

startsandpermitsDespite signs of a glut forming in apartment buildings in most cities, builders filed “permits” to build even more buildings. I know from my own due diligence that every new building in Denver will offer a new tenant up to two months free as a move-in incentive. I am getting reader reports of similar
apartment gluts in many other cities.

Six years of ZIRP and $3.6 trillion of printed money has stimulated an unprecedented degree and catastrophic amount of capital misallocation.  Massive bubbles have formed in every major asset category:   bonds, stocks, real estate and collectibles.

The bubble that has reformed in the housing market is going to result in a more painful collapse than the original housing bubble.  More on this later, but data available from the National Association of Realtors and RealtyTrac shows that 40% of the sales volume this year has been driven by individual investor/flippers.  We are at the point in the cycle at which many of them will be left “holding the bag.”   To compound the problem, many of these “retail” home traders are now using mortgages to fund their  game of hot potato.

I can’t speak on this for every major city, but I know for a fact that in metro-Denver there has been a recent “flood” in home listings.  Even more indicative, I am now receiving “new price” alerts via REColorado several times a day, mostly in the over $800,000 price range. The glut that has formed in both rental apartments and higher end homes for sale in Denver is nothing short of stunning.

The Fed is out of the type of bullets that can be used to support the massive Housing Bubble 2.0 that it has premeditatively blown.  Interest rates are already at zero, although starting to rise uncontrollably on the longer end.  Mortgage rates have blown out close 100 basis points from the recent bottom.  Easy credit has flooded the mortgage banking system in many different forms.

To be sure, the Fed can print a lot more money – and most likely will.  But at this point in the game it will be the equivalent of pushing on the proverbial string.  Only this time the hole through which the Fed will be trying to push the string will be closed.

Hovnanian Ushers In The Next Housing Market Collapse

As we discussed on our first quarter conference call, we expected our second quarter gross margin to be adversely affected by incentives and concessions on started unsold homes. However, the impact was greater than we anticipated and we are disappointed with our second quarter results.  – Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer,  HOV 2nd Qtr 8-k

There’s a reason Ara Hovnanian dumped 315,000 shares of HOV stock on April 16th, 2015 – Insider stock selling ahead of an earnings disaster.

Hovnanian greeted the stock market this morning with a big earnings miss.  It’s stock plunged as much as 15%:

HOVI may have been a bit early in forecasting my demise of the housing market, but I know I’m right.  HOV is the 7th largest homebuilder in the country.  It sells homes in 18 States, including the largest housing markets for new homes like California, Texas and Florida.   HOV primarily sells into the first-time and move-up buyer market.  In other words, it’s Q2 results are a good barometer of the market for new home sales in general.

Although it’s revenues were higher thanks to the bubble in new home prices, HOV’s gross margins plunged 400 basis points from 20.1% last year in Q2 to 16.1% in its latest quarter. This is due to the expense associated with started but unsold homes. A feature that is endemic to every homebuilder I research.  It’s total unit home deliveries dropped 3.2% vs. the Q2 2014.

It’s Cost of Sales also includes over $4 million inventory and land option write-offs vs. $522k in Q2 2014. While not large relative to its total cost of sales, inventory and land write-offs are going to become a recurring feature with every homebuilder going forward.

Despite a decline in home deliveries, HOV ballooned its inventory by $200 million in the last six months ($1.3 billion in Oct 2014 vs. 1.5 billion at the end of the most recent quarter). Inventories at all of the homebuilders have swelled up to record levels – even highher than at the peak of the big housing bubble. This is despite the fact that unit sales volume is roughly 1/3 of peak unit sales volume.

An even more shocking fact is that the amount of debt per housing unit sold at EVERY homebuilder is several times higher than it was at the peak of the housing bubble. For instance, at $1.95 billion HOV’s debt load has increased $259 million in the last six months. On a trailing 12 month basis, HOV has delivered 5,836 homes. This translates into $333,790 of debt per home unit delivered.

I have always predicted that HOV would be the first homebuilder to hit the wall.  This is why I have not published a research report on the Company: It’s stock has been below $10 since late 2007. It’s not worth shorting.

However, I have published in-depth research reports on the two stocks that I think are most likely to follow HOV into the bankruptcy abyss.  Both of these companies have operating and financial profiles which are quite similar to that of HOV.  Both of these stocks plunged and then rebounded about six months ago.  I believe that we will see them plunge and stay down at some point in the next 3-6 months.  The problem is, you have to positioned ahead of the plunge or you will miss it.

You can access the report for either company here:

NewPrice




 

PAYPALLOGO




I will have more on this later, but now the legacy home equity loans left over from the big housing bubble are going to start torpedo-ing the financial system. No one has thought about these roadside financial exploding devices, but starting in mid-2014 and ballooning up quickly from there, home equity loans sitting dormant other than a small monthly interest payment have been and will be converting to fixed-rate amortizing 2nd mortgages. The monthly payment on these will double or triple for most homeowners with HELOCs resetting. The amount sitting on bank balance sheets is over a half trillion dollars. For its quarter ended March 31, the delinquency rate on its HELOC balances jumped 124%.

Just when mom and pop home flippers were thinking that the water was nice and warm, they are going to get ripped apart by a new wave of distressed home sellers and foreclosure auctions. For the record, I search for home listings on just one zip code in central Denver. I am now getting at least one “new price” email per day, including three yesterday and one today already. The next leg down in the housing market is starting…

The Next Housing Crash Is “Coming Soon”

If you’ve bought in the last two years you will be underwater sleeping with the fishes like Luca Brasi (from “The Godfather”) in the not too distant future.  – Jim Quinn, The Burning Platform

Anyone seeing a surge in “Coming Soon” signs on top of realtor signs?  I drive all around Denver almost everyday surveying the housing market from a “boots on the ground” perspective.   I’m seeing both a lot more “coming soon” and “for rent” signs in every neighborhood.  For those who don’t know, “coming soon” just means that one broker has an exclusive right to sell a home for short period of time before it’s listed officially in the MLS database.  It represents “for sale” inventory that does not get picked up by NAR estimates for about three months (NAR inventory numbers lag).

The housing market has already crashed.  The crash occurred in 2005-2006.  The visible evidence of the crash emerged in 2007-2009 when foreclosures piled up and prices crashed.   The reality is that  were are in the middle of housing bear market that was interrupted by several trillion dollars of market intervention – direct and indirect – by both the Federal Reserve and the U.S. Government.   Several trillion dollars and this is all we get for a dead cat bounce? (source, Shadowstats.com) – click to enlarge:

New  home sales

I wrote an article for Seeking Alpha explaining why the housing stocks are currently the most overvalued that they’ve been in history, especially in relation to their underlying business and financial fundamentals.  “In the context of both new homes sales and homebuilder market sentiment, I believe that homebuilder stock valuations have become exceedingly “stretched” to the upside.”

You can read the rest of my analysis here:   April New Home Sales, Homebuilder Sentiment And Overvalued Homebuilder Stocks.

houseingbubble-investwithalexOne aspect that no one is discussing is the fact that in the last several months, a preponderance of home sales volume has been driven by “mom and pop” speculators.  While historically “retail” flippers have been using cash to buy homes, current data shows that the most of them have resorted to using mortgage debt.

We’ve seen this movie before.  This Fed-fueled dead-cat market bounce in housing is just about over and the next leg down will particularly brutal, especially for anyone who has legitimately bought a home to live in over the last couple of years.