Tag Archives: mortgage fraud

No Virginia: The Falling Housing Market Isn’t About Tight Inventory

Financial Markets, Housing Market, Market Manipulation, U.S. Economy, , , ,

The National Association of Realtors released its monthly  “Pending” home sale report for April this morning.  It fell 1.3% from March.  The Wall Street analytic “brain trust” was looking for a 0.4% gain.  The housing data is repetitively coming in well below Wall Street forecasts. This is emblematic of the unrealistic amount of “hope” built into the psychology of the American investor, who wants badly to believe anything he is told by “experts.”  A cynic might say it’s adverse denial of reality…

The NAR’s chief pimp, Larry Yun, once again is blaming the bad numbers on shortages of homes across the country.  This narrative is the pinnacle of mendacity.  Too be sure, in certain “hot” areas, there is a shortage of sub-$500k homes.  Blame the Government, which has made available Taxpayer-backed mortgages to anyone who can fog a mirror – see this article, for instance.  And blame the flippers, who are snapping up low-priced homes on the hope that they can turn it around and sell it to one of the fog-the-mirror buyers using a Government subsidized mortgage.

In truth, a recent survey showed that more than 50% of the inventory nationwide is in the high-priced (over $750k) price segment.  And prices are falling in most markets in this category, led by New York City (all five boroughs), which is starting to get decimated.

XHB is an ETF that tracks the S&P Homebuilders Select Industry Index. Lowes and Home Depot are the largest holdings. Pulte (PHM), NVR Inc (NVR) and DR Horton (DHI) are the next three largest holdings. Like the DJUSBH, it’s a mix of homebuilders and housing market-related stocks (building construction suppliers, etc).

Recently there’s been some extraordinarily large put positions purchased on XHB (XHB closed at $39.11 on Friday). For instance, on Monday and Tuesday last week, someone bought 2,200 and 2,500 June 15th $40-strike puts. There’s 4,551 June 15th $38-strike put open interest as well. These numbers substantially outnumber the open call options for the June 15th expiry. There’s 15,033 of open interest in the September $35’s, with 4,400 of those purchased this past Thursday. The largest September call open interest is 1,393 $42’s.

The point here is that some entities – probably a few hedge funds – are making a rather large bearish bet on the housing sector. It’s hard to know if the puts are being used to speculate or as a hedge. Either way, the sheer volume of puts purchased reflects heavy bearish sentiment toward the sector.

Peak flipping? I also strongly suspect that the NAR skews its data-sample toward the lower-price market segment. In other words, if it included a higher percentage of over $750k homes in its data-collection and sales calculation, the existing home sales number for April would have been lower. It’s the magic of statistics. I would also suggest that there was probably some sales “pulled forward” out of fear of rising interest rates. Typically there’s a surge in homebuying when interest rates begin to rise. Certainly the mortgage brokers are pitching the “buy now before rates go higher” story.

On a seasonal basis, home sales should be rising from March to April, even on a seasonally adjusted annualized rate basis. Furthermore, the prospect for May – assuming the NAR does not pull any statistical chicanery – is not good. How do I know? Because mortgage purchase applications have been down 5 weeks in a row. Four of the past five weeks, purchase apps were down 2% each week and one week was down 0.2%. This is why the XHB is down 15.6% since peaking in late January. Some of the homebuilders I’ve been recommending as shorts are down north of 20%. They still have a long way to drop.

My Short Seller Subscribers and I are raking in easy money shorting and buying puts on individual homebuilders. I discuss timing and options strategies. I also disclose my trades.  I also present data and analysis that you won’t find in the mainstream or alternative media.  You can learn more about this newsletter here:  Short Seller’s Journal information.

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New Home Sales For May: Statistical Measurement Failure

Financial Markets, Housing Market, Market Manipulation, U.S. Economy, , , ,

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.