Tag Archives: mortgage rates

Why Housing Won’t Bounce With Lower Rates

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

“Our advice is to own as little exposure U.S. equity exposure as your career risk allows.” – Martin Tarlie, member of portfolio allocation at Grantham, Mayo, Van Otterloo investment management

The following is an excerpt from the latest Short Seller’s Journal:

Economy is worse than policy makers admit publicly – Less than four months ago, the FOMC issued a policy statement that anticipated four rate hikes in 2019 with no mention of altering the balance sheet reduction program that was laid out at the beginning of the QT initiative. It seems incredible then that, after this past week’s FOMC meeting, that the Fed held interest rates unchanged, removed any expectation for any rate hikes in 2019, and stated that it might reduce its QT program if needed. After reducing its balance sheet less than 10%, the Fed left open the possibility of reversing course and increasing the size of the balance sheet – i.e. re-implementing “QE” money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

Housing market – As I suggested might happen after a bounce in the first three weeks of January, the weekly purchase mortgage index declined three weeks in a row, including a 5% gap-down in the latest week (data is lagged by 1 week).  This is despite a decline in the 10-yr Treasury rate to the lowest rate for the mortgage benchmark Treasury rate since January 2018.

Not surprisingly, the NAR’s pending home sales index – released last Wednesday mid-morning for December – was down 2.2% vs November and tanked nearly 10% vs. December 2017. Pending sales are for existing home sales are based on contracts signed. This was the 12th straight month of year-over-year declines. Remarkably, the NAR chief “economist” would not attribute the decline to either China or the Government shutdown. He didn’t mention inventory either, which has soared in most major metro areas over the past couple of months.

For me, the explanation is pretty simple: The average household’s cost to service debt has reached a point at which it will become more difficult to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA):

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century.  Fannie Mae raised the maximum DTI (debt-to-income ratio – percentage of monthly gross income that can be used for interest payments) to 50% in mid-2017 to qualify for a mortgage. This temporarily boosted home sales. That stimulus has now faded. And despite falling interest rates, the housing market continues to contract.

That said, the Census Bureau finally released new home sales for November. It purports that new homes on a seasonally adjusted, annualized rate basis rose a whopping 16.9% from October. I just laughed when I saw the number. The calculus does not correlate either with home sales data reported by new homebuilders or with mortgage purchase applications during that time period (new home sales are based on contract signings). 90% of all new home buyers use a mortgage.

The November number was a 7.7% decline from the November 2017 SAAR. According to the Census Bureau, the months’ supply of new homes is at 6, down from October’s 7 but up from November 2017’s 4.9. A perusal of homebuilder balance sheets would show inventories near all-time highs (homebuilders do not always list finished homes on MLS right away if a community already has plenty of inventory). The average sales price of a new home dropped to 8.4% from $395,000 in October to $362,000 in November. Anyone who purchased a new home with a less than 9% down payment mortgage during or prior to October is now underwater on the mortgage.

Absent more direct Government subsidy and Fed stimulus, the housing market is going to continue contracting, with prices falling. Anyone who bought a home with less than a 10% down payment mortgage over the last 3-5 years will find themselves underwater on their mortgage.  I expect home equity mortgage delinquencies and default to begin rising rapidly in the 2nd half of 2019.

In the last issue of the Short Seller’s Journal, I presented my favorite homebuilder shorts along with put option and short selling call option ideas. You can learn more about this newsletter here:   Short Seller’s Journal information

 

The Housing Market Is Sliding Down The Wall It Hit In Late August

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

A couple of my subscribers emailed me expressing frustration over the fact that their recent homebuilder puts are either not moving higher or losing value despite the sell-off in the overall stock market. There’s two factors. First, the homebuilder sector has dropped well over 30% since late January. To an extent there may be some seller’s fatigue. At some point there will be short term rally that could generate at 15-25% bounce in the sector. I believe that rally will occur from a lower level on the DJUSHB currently, but it’s always a risk if you are short.

The second factor is the abrupt move in the 10yr Treasury yield from 3.25% down to 2.85%. This move occurred in four weeks. This is a big move in that period of time. Hedge fund algos are programmed to buy homebuilders when interest rates drop on the premise that lower rates stimulate home sales. It’s really that simplistically knee-jerk. That’s why the Dow can fall 400 points and the homebuilders remain flat or even move higher (stocks fall and the money flows into Treasuries which drives yields lower and homebuilders higher). Since the stock market began dropping in late October, the DJUSHB has moved from 595 to as high as 683 intra-day on November 28th. I’m surprised it didn’t bounce over 700. The move from 595 to a high-close of 686 on November 29th. This is nearly a 15% bounce. The DJUSHB closed at 643 this past Friday, down 5.6% from the 686 close.

But lower rates in the current context are not going to be a benefit for home sales. The mini-crash in the 10yr yield, combined with the flat yield curve, reflects a weak economy growing weaker. Potential homebuyers, in conjunction with the tightening credit market discussed above, are going to find it hard to qualify for a mortgage. Many no longer have the ability to make even a 3% down payment. Two weeks ago on Friday, when the stock market began to tank, the DJUSHB was up as much 14 points from Friday’s close. The DJUSHB closed down 8 points (1.2%) for the day. This was with the 10yr yield closing at its lowest yield since August 31st. On that day, the DJUSHB closed at 768. With the DJUSHB at 661, it’s 14% below where it was trading the last time the 10yr hit 2.85%.

Reinforcing my assertions above about the financial condition of prospective middle class homebuyers, The U of Michigan released its December consumer sentiment index on Friday. While the overall index was flat vs November, the future expectations component (the “hope” index) fell to its lowest level since December 2017. However, the homebuying conditions index fell to its lowest in 10 years. Recall that the homebuilders sentiment index for November plunged.

The graph below shows what’s going with builders in terms of actual economics. The chart plots the ratio of homebuilding permits to completions. Permits can be a fluff number because a homebuilder does not have put up much money to file a building permit. But completions reflects both demand and a homebuilder’s willingness to build spec homes (homes without buyer orders). A falling ratio indicates falling demand from buyers, rising order cancellation rates and risk aversion from homebuilders.

Another indication of the air flowing out of the housing bubble is the bidding war indicator. A subscriber sent me an article from the Seattle Times on the stunning drop in multiple bids for the same home across the country in the previously hottest bubble areas. In February 2018 in Seattle, for instance, 81.4% of listed homes had multiple bids. By November that number plunged to 21.5%, the lowest percentage of multiple bids on homes for sale in the history of the metric (Redfin began tracking this data in 2011). Other cities that made the top-10 list by Redfin include Boston, L.A., San Diego, Washington DC, Denver, Portland, Austin – all included in any list of the hottest bubble markets over the last 5 years.

The bottom line: We may have just seen the first real bear market counter-trend rally in the builders when the DJUSHB jumped 15% over three months. If the 10yr continues to drift lower, we might see one more push higher.

The above commentary is an excerpt from a recent Short Seller’s Journal.  The latest issue has a short idea related to new housing starts that has at least 50% downside.  To learn more about this newsletter, click here:   Short Seller’s Journal information

Trump’s Trade War Dilemma And Gold

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , , , ,

If the “risk on/risk off” stock market meme was absurd, its derivative – the “trade war on/trade war off” meme – is idiotic.  Over the last several weeks, the stock market has gyrated around media sound bytes, typically dropped by Trump,  Larry Kudlow or China,  which are suggestive of the degree to which Trump and China are willing to negotiate a trade war settlement.

Please do not make the mistake of believing that the fate the of the stock market hinges on whether or not Trump and China reach some type of trade deal.  The “trade war” is a “symptom” of an insanely overvalued stock market resting on a foundation of collapsing economic and financial fundamentals.  The trade war is the stock market’s “assassination of Archduke Franz Ferdinand.”

Trump’s Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down the dollar from 97 to 88 to stimulate exports. After Trump was elected, gold was pushed down to $1160. It then ran to as high as $1360 – a key technical breakout level – by late April. In the meantime, since Trump’s trade war began, the U.S. trade deficit has soared to a record level.

If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared accept – especially considering the massive paper derivative short position in gold held by the large bullion banks.  This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.

I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold. Ultimately, the U.S. debt problem will unavoidably pull the plug on the dollar.  Ray Dalio believes it’s a “within 2 years” issue. I believe it’s a “within 12 months” issue.

Irrespective of the trade war, the dollar index level, interest rates and the price of gold,  the stock market is headed much lower.   This is because, notwithstanding the incessant propaganda which purports a “booming economy,” the economy is starting to collapse. The housing stocks foreshadow this, just like they did in 2005-2006:

The symmetry in the homebuilder stocks between mid-2005 to mid-2006 and now is stunning as is the symmetry in the nature of the underlying systemic economic and financial problems percolating – only this time it’s worse…

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The commentary above is a “derivative” of the type of analysis that precedes the presentation of investment and trade ideas in the Mining Stock and Short Seller’s Journals. To find out more about these newsletters, follow these links:  Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

The Trade War Shuffle And The Fukushima Stock Market

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , , ,

The market is already fading quickly  from the turbo-boost it was given by the announcement that China and Trump reached a “truce” on Trump’s Trade War – whatever “truce” means.   Last week the stock market opened red or deeply red on several days, only to be saved by a combination of the repetitious good cop/bad bad cop routine between Trump and Kudlow with regard to the potential for a trade war settlement with China and what has been dubbed the introduction of the “Powell Put,” in reference to the speech on monetary policy given by Fed Chair, Jerome Powell, at the Economic Club of New York on Wednesday.

It’s become obvious to many that Trump predicates the “success” of his Presidency on the fate of the stock market. This despite the fact that he referred to the stock market as a “big fat ugly bubble” when he was campaigning.  The Dow was at 17,000 then. If it was a big fat ugly bubble back then, what is it now with the Dow at 25,700? If you ask me, it’s the stock market equivalent of Fukushima just before the nuclear facility’s melt-down.

Last week and today are a continuation of a violent short-squeeze, short-covering move as well as momentum chasing and a temporary infusion of optimism. I believe the market misinterpreted Powell’s speech. While he said the Fed would raise rates to “just below a neutral rate level,” he never specified the actual level of Fed Funds that the Fed would consider to be neutral (neither inflationary or too tight).

I believe the trade negotiations with China have an ice cube’s chance in hell of succeeding. The ability to artificially stimulate economic activity with a flood of debt has lost traction. The global economy, including and especially the U.S. economy (note: the DJ Home Construction index quickly went red after an opening gap up), is contracting. Trump and China will never reach an agreement on how to share the shrinking global economic pie.

While Trump might be able to temporarily bounce the stock market with misguided tweets reflecting trade war optimism, even he can’t successfully fight the Laws of Economics. His other war, the war on the Fed, will be his Waterloo. The Fed has no choice but to continue feigning a serious rate-hike policy. Otherwise the dollar will fall quickly and foreigners will balk at buying new Treasury issuance.

For now, Trump seems to think he can cut taxes and hike Government spending without limitation. But wait and see what happens to the long-end of the Treasury curve as it tries to absorb the next trillion in new Treasury issuance if the dollar falls off a cliff.  Currently, the U.S. Treasury is on a trajectory to issue somewhere between $1.7 trillion and $2 trillion in new bonds this year.

Despite the big move higher in the major stock indices, the underlying technicals of the stock market further deteriorated. For instance, every day last week many more stocks hit new 52-week lows than hit new 52-week highs on the NYSE. As an example, on Wednesday when the Dow jumped 618 points, there were 15 news 52-week lows vs just 1 new 52-week high. The Smart Money Flow index continues to head south, quickly.

For now it looks like the Dow is going to do another “turtle head” above its 50 dma (see the chart above) like the one in early November. The Dow was up as much as 442 points right after the open today, as amateur traders pumped up on the adrenaline of false hopes couldn’t buy stocks fast enough. As I write this, the Dow is up just 140 points. I suspect the smart money will once again come in the last hour and unload more shares onto poor day-traders doing their best impression of Oliver Twist groveling for porridge.

Guest Post: New Home Sales Collapse

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

Note: New homes sales, based on the seasonally adjusted annualized rate metric, are down over 23% from their peak in November 2017. Pending home sales, which translate into existing home sales less canceled contracts (typically failed financing), are down on a year-over-year basis 11 out of the last 12 months. But it’s not just interest rates, which aren’t up much from their lows in the context of the last 20 years. A bigger factor is “market mortgage fatigue.” The Govt has tapped out the pool of potential mortgagees by continuously lowering the bar for qualifying for a FNM/FRE mortgage. In addition, the Government slashed the cost of PMI insurance. That plus the tax cut have offset the cost effect of slightly higher mortgage rates (up about 1% in the last year – big deal). The remaining pool of first time buyers largely will have trouble qualifying until the Government lowers the bar again…

Aaron Layman, who is one of the few honest realtors, wrote a worthwhile commentary, posted below, on the state of the housing market. You can visit Aarons’s site here: AaronLayman.com

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The Census Bureau numbers for October new home sales posted at a seasonally adjusted annual rate (SAAR) of 544,000 units. This was way below expectations of a 575,000 print, and near a three-year low. As I have been detailing for much of the year, much of that “pent-up demand” that you hear real estate industry mouthpieces talking about is a giant work of fiction, a tired marketing ploy that the media, economists and Realtors have been using in attempt to justify grossly inflated home prices across the U.S.

Well, it appears the cat is officially out of the bag with the release of October home sales. While the previous months sales were revised higher, the miserable October print just corroborates my thesis that the Fed’s asset-bubble unwind is just getting started. There are plenty of other consequences in the pipeline. It’s important to remember that the housing market, thanks to the Federal Reserve’s failed policies, is more intricately tied to the financial markets than ever before. This was the Faustian bargain that Obama and the Fed made when they decided to bail out every Wall Street institution under the sun at the expense of American taxpayers, including the ones running obvious accounting control frauds. Of course the millions of homeowners who lost their homes to foreclosures (many of those executed in kangaroo courts with fraudulent robosigned documents) were deemed acceptable collateral damage to save the “system”.

The ultimate con was of course advertised as a salvation of the economy. In reality it just delayed the eventual reset with a new pile of debt that is larger than ever and spread among multiple asset classes rather than just housing. The big problem, one that the Fed’s economists remain willfully ignorant of, is the unfortunate reality that all of this speculative debt is more interest-rate sensitive than they would have you believe. The new home sales market is exposing this unfortunate dilemma very clearly.

According to Census numbers, new home sales in October collapsed 12 percent from the same time last year. Sales were down 8.9 percent from the revised September print. The median price of a new home contracted in October was 309,700, down $9800 or 3 percent. The average price of a new home contracted in October came in at $395,000, up $1,000 from October of last year. The supply of new homes for sale in October rose to 7.4 months, a 32 percent jump from October of last year! So if prices fell three percent and supply jumped higher, why the big collapse in sales? Can you spell “housing market bubble”. Aside from the swoon in the stock market during October, the other key ingredient for deflating an asset bubble was also present, as interest rates hit a multi-year high. We now have a good idea of what the breaking point for the housing market is, and it’s a lower threshold than many in the media were/are willing to admit. This is the result of years of rampant artificial asset price inflation courtesy of the Federal Reserve.

The swoon in new home sales is simply the reflection of moral hazard coming home to roost. While the media, the Fed and its army of economists have continued to tout the amazing bull market “recovery”, the sand (debt) upon which it was built is now shifting. That carefully crafted narrative that we have been spoon-fed for the last several years is looking more tenuous by the day.

Powell Just Signaled That The Next Crisis Is Here

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

Housing and auto sales appear to have hit a wall over the last 8-12 weeks.  To be sure, online holiday sales jumped significantly year over year, but brick-n-mortar sales were flat. The problem there:  e-commerce is only about 10% of total retail sales.  We won’t know until January how retail sales fared this holiday season.  I know that, away from Wall Street carnival barkers, the retail industry is braced for disappointing holiday sales this year.

A subscriber asked my opinion on how and when a stock market collapse might play out. Here’s my response: “With the degree to which Central Banks now intervene in the markets, it’s very difficult if not impossible to make timing predictions. I would argue that, on a real inflation-adjusted GDP basis, the economy never recovered from 2008. I’m not alone in that assessment. A global economic decline likely started in 2008 but has been covered up by the extreme amount of money printed and credit created.

It’s really more of a question of when will the markets reflect or catch up to the underlying real fundamentals? We’re seeing the reality reflected in the extreme divergence in wealth and income between the upper 1% and the rest. In fact, the median middle class household has gone backwards economically since 2008. That fact is reflected in the decline of real average wages and the record level of household debt taken on in order for these households to pretend like they are at least been running place.”

The steep drop in housing and auto sales are signaling that the average household is up to its eyeballs in debt. Auto and credit card delinquency rates are starting to climb rapidly. Subprime auto debt delinquencies rates now exceed the delinquency rates in 2008/2009.

The Truth is in the details – Despite the large number of jobs supposedly created in October and YTD, the wage withholding data published by the Treasury does not support the number of new jobs as claimed by the Government. YTD wage-earner tax withholding has increased only 0.1% from 2017. This number is what it is. It would be difficult to manipulate. Despite the Trump tax cut, which really provided just a marginal benefit to wage-earners and thus only a slight negative effect on wage-earner tax withholding, the 0.1% increase is well below what should have been the growth rate in wage withholding given the alleged growth in wages and jobs. Also, most of the alleged jobs created in October were the product of the highly questionable “birth/death model” used to estimate the number of businesses opened and closed during the month. The point here is that true unemployment, notwithstanding the Labor Force Participation Rate, is much higher than the Government would like us to believe.

Fed Chairman Jerome Powell signaled today that the well-telegraphed December rate hike is likely the last in this cycle of rate-hikes, though he intimates the possibility of one hike in 2019. More likely, by the time the first FOMC meeting rolls around in 2019, the economy will be in a tail-spin, with debt and derivative bombs detonating. And it’s a good bet Trump will be looking to sign an Executive Order abolishing the Fed and giving the Treasury the authority to print money. The $3.3 billion pension bailout proposal circulating Congress will morph into $30 billion and then $300 billion proposal. 2008 redux. If you’re long the stock market, enjoy this short-squeeze bounce while it lasts…

Stock, Bond, and Real Estate Bubbles Are Popping – Got Gold?

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , , ,

“I don’t know how this whole thing is going unwind – I just think it’s not going to be pleasant for any of us, even if you own gold and silver.  I think owning gold and silver gives you a chance to survive financially and see what it’s going to look like on the other side of what is coming…”

My good friend and colleague, Chris Marcus, invited me on to his Stockpulse podcast to discuss the financial markets, economy and precious metals.  In the course of the discussion, I offer my view of the Bank of England’s refusal to send back to Venezuela the gold the BoE is  “safekeeping” for Venezuela.

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

Treasury Debt And Gold Will Soar As The Economy Tanks

Financial Markets, Gold, Housing Market, Market Manipulation, Precious Metals, U.S. Economy, , , ,

“People have to remember, mining stocks are like tech stocks where everybody and their car or Uber driver piles into them when they’re moving higher. It’s not a well-followed, well-understood sector which is what I like about it because it means there’s plenty of opportunities to make a lot money in stocks that don’t end up featured on CNBC or everybody’s favorite newsletter.”

Elijah Johnson of Silver Doctor’s (silverdoctors.com) invited me on his podcast to discuss the fast-approaching economic crisis and my outlook for the precious metals sector:

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I’ll be presenting a detailed analysis of the COT report plus a larger cap silver stock that has had the crap beat out of it but has tremendous upside potential in my next issue of the Mining Stock Journal. You can learn more about the Mining Stock Journal here:  Mining Stock Journal information

Housing Market Collapse: Gradually Then Suddenly

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

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
– “The Sun Also Rises” – Hemingway

Zillow Group stock plunged 24% this morning after reporting Q3 numbers that missed revenue and net income estimates. In addition, the Company revised Q4 lower. ZG is down 52% after hitting hitting an all-time high of $65 in mid-June.

Zillow Group is sort of a “derivative” of the housing market. It “derives” its revenues from all activities related to home sales – realtor commissions, advertising, mortgage fees, internet search traffic, flipping, investing, rentals.  As such, the plight of Zillow foreshadows the plight of the entire housing market.

The Dow Jones Home Construction index is down 35% since January 22nd. The housing stocks have been in a bear market – at least as defined by the financial media – for several months. It’s amusing to note that the financial media conveniently ignores this fact. It’s as if there’s a hidden regulation that forbids financial reporters from reporting anything negative about the economy and markets.

But the data I analyze and present to my Short Seller’s Journal subscribers shows that the housing market has been contracting for several months. And it’s not about the moronic “low inventory” narrative promoted by the snake-oil salesman at the National Association of Realtors and aggressively propagated by the media. Inventory, especially for lower-priced new construction homes, has been rising quickly this year.

More negative data was released just this morning, as the Mortgage Bankers Association reported that its purchase mortgage index dropped 5% from a week ago. This data is “seasonally adjusted” for those of you looking to apply the seasonality spin.

Purchase mortgage applications are a leading indicator of future home sale closings.  The data has been trending highly negative since April this year.

I presented Zillow as a short idea in my Short Seller’s Journal earlier this year when the stock was in the $50’s. While Wall Street analysts were selling housing market bull-spin, I was digging into Zillow’s numbers and concluded that ZG was eventually going to experience a “come to Jesus” moment.  In last week’s issue I presented another housing market “derivative” stock that has at least $100 of downside (and likely more).

Similarly, while most homebuilder stocks are down over 30% from their January highs, there’s a bigger bloodbath coming in the near future.  Data I receive from subscribers around the country show that home sales in some of the previously hottest bubble markets were down 20-30% in October.

I expect that the housing market “re-adjustment” will be more severe this time in comparison to the “Big Short” mid-2000’s market collapse.  Because the housing market and all the economic activity connected to home sale activity is about 25% of GDP, a housing market collapse will translate into general economic collapse that will be worse than the recession associated with “Great Financial Crisis.”

The Homebuilder Stock Train Wreck

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

One of the proprietors of StockBoardAsset.com tweeted about two weeks ago wondering when the stock market was going to start pricing in a slow-down in the economy. To that I responded by pointing out that the DJ Home Construction index is starting to price in a housing market crash. Residential construction + all economic activity connected to selling and financing existing homes is probably around 25-30% of the GDP when all facets of the housing market are taken into account (realtor activity, mortgage finance, furniture sales, etc). It’s quite surprising to me that almost no one besides the Short Seller’s Journal has been pounding the table on shorting the homebuilders.

In the mid-2000’s financial bubble, the housing market’s demise preceded the start of the collapse of the stock market by roughly 18 months.  This is what we are seeing now. Again, to rebut the tweet mentioned above, the homebuilder stocks and the housing market are strong leading indicators.

The chart above is the DJ Home Construction Index on a weekly basis going back to April 2005. The homebuilder stocks peaked in July 2005, well ahead of the 2008 financial system de facto collapse.  Back then the index plummeted 51% over 12 months before experiencing a dead-cat bounce.  So far it’s dropped 33% from January 22nd.  Regardless of the path down that the index follows this time, it still has along way go before the excesses of the current housing bubble are “cleansed.”

The housing market may be melting way more quickly than I expected. Existing home sales for September showed that sales dropped 3.4% from August on a SAAR basis (seasonally adjusted annualized rate) and 4.1% year-over-year. Sales dropped to a 3-year low. August’s original report was revised lower. It was the 7th straight month of year-over-year monthly declines. The 5.15 million SAAR missed Wall Street’s estimate by a country mile. It’s always amusing to read NAR chief “economist” Larry Yun’s sales-spin on the bad numbers, if you have the time.

New home sales for September cratered, down 5.5% from August. This is a “seasonally adjusted, annualized rate” calculation so seaonality is theoretically “cleansed” from the monthly comparison.  BUT, August’s original print was revised from 629k to 585k, a rather glaringly large 7% overestimate.  The 553k print for September was 12% below the fake August report.  Likely a gross overestimate by the Census Bureau plus an unusually large number of contract cancellations between the original report and the revision.  But here’s the coup de grace:  new homes sales for September plunged 13.2% year over year from September 2017. The median sales price plummeted – so “affordability” was less of a factor. And inventory soared to 7.1 months – the highest since March 2011.  Hey Larry (Yun of the NAR) – care to comment on the inventory report for new homes?

Pending home sales – a leading indicator for existing home sales (pendings are based on contract signings, existing sales are based on closed contracts) were up slightly in September from August. But August’s original pending sales report was revised lower.  These numbers are seasonally adjusted and annualized.  Pendings were down 3.4% year over year, the 10th YOY decline in the last 11 months.

Never mentioned by the media or highlighted by the NAR reports, “investor”/flipper’s have been about 15-20% of the existing home sales volume for quite some time. I would suggest that many of newer “for rent” signs popping up all over large metro areas are coming from flippers who are now underwater on their buy, hoping to earn some rental income to cover the carrying cost of their “investment.”

At some point flippers who are stuck with their flip purchases are going to panic and start unloading homes at lower prices. Or just walk away. This was the catalyst that started the pre-financial crisis housing crash in 2007/2008.

The housing market is on the precipice of a large cyclical downturn.  My view is that this decline will be worse than the previous one.  The Fed injected $2.5 trillion into the housing market to revive it.  That heroin has worn off and the printed money and debt junkie would require twice as much to avoid death from withdrawal.  The bottom line is that, despite a 33% drop in the homebuilder stocks since late January,  these stocks – and related equities – have a long way to fall.  From July 2005 to November 2008, the DJUSHB dropped 87%.  It will likely be worse this time because the homebuilders are bloated up with even more debt and inventory than last time around.

I cover the housing market and homebuilder stocks in-depth in the weekly Short Seller’s Journal.  Myself and my subscribers have made a lot of money shorting this sector, including using put options.  To find out more, click here:  Short Seller’s Journal information.