Tag Archives: National Association of Realtors

Housing Market Supply And Demand: Just The Facts

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“Housing – people are insane if they think housing isn’t going to get crushed with rising rates. As you outline often, it’s already happening in ( NY, Den, etc. ) I live in LA and most of my friends/ coworkers are telling me how dumb I am to not jump in. I know to just stay quiet, but I think they are about to walk into a buzz saw (again).” – email from a subscriber

The National Association of Realtors reports that December existing home sales fell more than the NAR led its Wall Street lap-dogs to believe they would decline. Larry Yun, the NAR’s market elf, has been blaming phlegmatic housing sales over the last two years on low inventory. There’s only one problem with this assertion: it’s not true based on historical data:

The chart above is drawn from data that the Fed, for some inexplicable reason, purged from its FRED database. It illustrates the inverse relationship – generally – that exists between inventory and sales. The bigger factor driving the economics of the housing market right now is the deteriorating financial condition of any household that might want to buy a house. The Fed and Government have largely exhausted the population of would-be mortgagees that can make a 0-3% down payment on a conventional mortgage plus carry the monthly burden of servicing that mortgage. The tax advantage from deducting real estate taxes was stripped from the equation. If you are thinking about changing your mortgage after reading the rest of this article then you may want to check out how to remortgage on Money Expert after reading this article.

I suspect the Fed is getting worried about the housing market. The Fed’s QE holdings rose $5 billion last week. The entire increase is attributable to an increase in mortgage holdings. Not only is the Fed not reducing its balance sheet, it felt compelled to inject capital into the mortgage market.

One thing to keep in mind. A large percentage of homes purchased and financed with 0-3% down payment mortgages in the last couple of years are underwater. When a buyer puts almost nothing down on a mortgage-financed home, the transaction costs all-in are about 10% of the value of the home. These homes are underwater at closing. Except in certain bubble areas, homes have not appreciated in value enough to make up for the amount that low down payment buyers are underwater when they closed. When the stock market eventually tanks, it will take home values down at least 30-40%, and possibly more.

Just like any market bubble, I believe the housing market is reaching the point of exhaustion. As households continue to get squeezed financially, there will be a lot of homes put on the market hoping for last year’s price. As I’ve mentioned before, when home prices are rising quickly, there’s an oversupply of buyers. When home prices start to drop, the buyers disappear. When prices are rising continuously, it’s very easy to sell a home. When prices begin to fall, it becomes difficult to sell a home. It’s been very easy to sell a home for the last 5+ years. I believe it’s going to start to become difficult to sell a home at current general price levels. The smartest sellers will price their home to move. This will begin the process of “re-pricing” the market lower, which in turn could trigger a flood of flipper homes to hit the market – just like 2007/2008.

Greenwich, Connecticut housing values are down 20%. Greenwich would be the “poster child” for the high-end housing market. NYC values are starting to get hammered. For taxpayers who itemize, the new tax law limits the deduction for State, local, sales and property taxes to $10,000. This will hammer the high-end market, which in turn will put downward pressure on everything below it.

The commentary above is an excerpt from the latest weekly Short Seller’s Journal. If you are interested in learning how to make money from the most overvalued stock market in U.S. history, visit this link for more information: Short Seller’s Journal subscription information.

Fake News Alert: Existing Home Sales Report

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I’m going to have to throw a flag on the existing home sales report for November published today by the National Association of Realtors.    The NAR would have us believe that home sales occurred in November at 5.6mm annualized rate for the month, up 15.4% from November 2015 and up .7% from October.   I will point out that, of course, the orignal report for October was revised lower.  But who pays attention to those details?

Take a look at this graphic sourced from Zerohedge which shows existing home sales plotted vs mortgage applications back to 2013:

I hate to be cynical, or accuse anyone of presenting “fake news,” but the mortgage application data completely contradicts the NAR’s “seasonally adjusted, annualized rate” interpretation of the data it collected. Existing home sales are based on closings (escrow clears), which means the sales report for November is based on contracts signed primarily from October and some in late Sept/early November. But mortgage applications began dropping off a cliff in late August. Clearly the NAR’s seasonal adjustment interpretation of the data is highly suspect.

Looking at the data itself  – LINK – you’ll note that the NAR’s data sampling shows that home sales dropped 6.7% from October.  Yet, it’s “seasonal adjustments” suggest that home sales increased from October to November, despite a massive plunge in mortgage applications during the period in which contracts would have been signed for November closings.

I’ve emailed the NAR several times over the years to have them explain their seasonal adjustments calculus.  Every time I am politely declined.  I will note that they use the same regression analysis model used by the Census Bureau.

The annual rate for a particular month represents what the total number of sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonal adjustments, which are determined by using the X-12 Variant created by the Census Bureau, are then used to factor out seasonal variances in resale activity.

They do at least disclose that, although, if anything, that fact detracts from the credibility of their calculations.  Of course, if I were looking for credibility, I would not advertise that I use the statistical guesstimate package created by the Government…

I would suggest that a year from now, anyone who looks back at the data produced today by the NAR will discover that the number was revised lower by a significant amount.  But who looks at revisions?  The Government and industry promotion organizations know this.  It doesn’t matter how far off the rails their initial “seasonally adjusted” data strays, as long as they revise them at some point in the future, when no one is looking, it gives them plausible deniability if they are ever held accountable.

In the next issue of the Short Seller’s Journal, I’m going to present a comprehensive analysis on the housing market and the damage already inflicted on it from a 1% rise in mortgage rates.  Despite the fact that S&P and Dow have been pushing all-time highs almost on a daily basis, the DJ Home Construction index is down over 11% from its July 52-week high.  I will show why in this next issue.  You can access more information and subscribe to the SSJ using this link:  Short Seller’s Journal.

 

The Housing Bubble Is Popping

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The Seasonally Adjusted Annualized Rate (SAAR) economic numbers are now manipulated beyond the definitional meaning of the word “absurd.”  This is especially true with the housing market and auto sales reports.  – Investment Research Dynamics

Today the NAR released its “pending home sales” index.  On a “seasonally adjusted annualized rate” basis, it showed 1.3% gain over June.  June’s original report was revised lower from +.8% to -.2%.  Mathematically, this downward revision enabled the National Association of Realtors to report a gain from June to July.  Keep in mind this is on a “seasonally adjusted” and “annualized rate” basis.

Now for the real story – at least as real as the reliability of the NAR’s data sampling  Untitledtechniques.   In the same report the NAR shows the “not seasonal adjusted” numbers. (click on image to enlarge) On a year over year basis for July, pending home sales were down 2.2%.  They were down 13% from June.   This is  significant for two reasons.  Using a year to year comparison for July removes seasonality and it removes the “seasonal adjustments.”   Just as important, if you look at historical data for existing home sales by month, “seasonality” between June and July is non-existent – i.e. in some years June sales exceed July and in other years July exceeds June.

The not seasonally adjusted data series is much more reflective  of the real trend in the housing market that has developed this summer than is the manipulated SAAR number vomited by the NAR’s data manipulators.  The 13% from June to July should shock the hell out of housing market perma-bulls.

FURTHERMORE, the not seasonally adjusted numbers are consistent with the highly correlated mortgage purchase applications data.   “Pending” sales are based contracts signed.  Concomitantly with signing a contract – the NAR reported that 80% of all existing home buyers in July used a mortgage – the buyer needs to file a purchase application.  But the Mortgage Bankers Association reported that mortgage purchase applications hit a 6-month low in July.    The mortgage applications data contradicts the NAR’s pending home sales report on a SAAR basis but is entirely consistent with the pattern in the not seasonally adjusted data.

The not seasonally adjusted data are pointing to a rapidly developing housing market implosion – 13% drop in contracts signed from June to July in a two-month period that has little if any seasonality and with 30-yr fixed mortgage rates hitting all-time lows.
Just like the big bubble which finally exploded in 2007-2008, I was early in my call on Housing Bubble 2.0  (HB 2.0).   Because it takes a lot of capital and “inertia” to move the housing market, directional movements take time to develop and they become fast-moving trains with no brakes – until they either hit a wall or hit the ground.  But change in direction happens suddenly.

When prices are moving up, the market becomes very illiquid on the “offered’ side and buyers become ravenous.  This occurred because the Fed dedicated $2 trillion of it’s QE to the mortgage market and the Government made Government-guaranteed mortgages much easier for buyers by taking the down payment requirement down to 3% and in some cases 0%.   But when the market rolls over, supply quickly builds and demand disappears and the market becomes very illiquid on the “bid” side.  The market is about to become very illiquid on the buyer side of the equation.

I made this call in my latest Short Seller’s Journal this past week:

The housing market is heading south now as well. It’s been my view, and I’ve supported this view with detailed analysis of new and existing home sales on my blog, that both the Government (new home sales report) and the National Association of Realtors (existing home sales report) are using their mysteriously calculated “seasonal adjustments” to inflate the true level of homes being sold on a monthly basis. MOREOVER, and this point is crucial to understand, to the extent that there are flaws in the “seasonal adjustments,” the “annualized rate” calculation compounds these flaws by a factor of 12.

As an example, last week’s new home sales report, which showed an unexpected and absurd 72,000 (SAAR) new homes sold in July vs expectations and 154,000 more homes sold vs. July 2015. However, the report also shows the “not seasonally adjusted, not annualized number for July, which never makes its way into the media reports. In that section it shows only 16,000 more homes vs the 154k SAAR headline sold year over for July AND a decline in sales from June to July of 6,000 homes. In other words, the sensationalized headline reports were manufactured out of thin air from the “seasonal adjustments” applied to the monthly numbers and then converted into an annualized rate

As you can see, the Government’s new home sales report is utterly unbelievable. In fact, the Mortgage Bankers Association has reported that mortgage applications to purchase homes hit a 6-month low in July. New home sales are based on contracts signed. With 93% of all new home buyers using a mortgage, if mortgage applications are not being filed, contracts are not being signed. It’s really that simple.

The NAR’s existing home sales report was well below consensus expectations and showed a 3.2% drop in existing home sales from June and a 1.6% drop from July 2015. These numbers are based on closings. Again, if mortgage purchase applications dropped in June and July, we can expect (or at least should expect )that existing home sales reports for at least the next two months will show further declines. Furthermore, the NAR uses the same statistical “adjustment” model as the Government. To the extent that the NAR’s SAAR numbers showed a decline, the true decline is likely much greater.

After the employment, GDP and inflation reports, the home sales reports from both the Government and the National Association of Realtors are among the most highly manipulated economic data reports.  The data is heavily modeled and massaged via the “seasonal adjustments.”

The truth from the ground, based on the extensive footwork due diligence I conduct plus emails from readers around the country reporting similar observations, is that the inventory of home listings of soaring (the published inventory reports by design have 2-3 month lag), prices are dropping quickly, the time it takes to sell a home is increasing significantly and, most important, the potential pool of middle class home buyers no longer have an income level that will support the size of mortgage it takes to “buy” a home.

Short-sell ideas are starting to work again.   The short-sell selections in my Short Seller’s Journal have now worked four weeks in a row.   My pick from 3 weeks ago is down 6%.  At one point it was down 10%.  The pick from two weeks ago gave subscribers a quick 13% drop after it reported earnings and it’s still down 10%.   My pick from last week is down nearly $2  (2.3%)  after 2 1/2 days of trading  but the puts are up 42%.  I am also making several homebuilder short recommendations now each week.

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Housing: I’ve Worked Thru 4 Bubbles – They All End The Same

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The three primary drivers of the economy are starting to head south:  retail, housing, autos.  I can smell the housing market slipping away now. I’ve been early on housing, like I was when the mid-2000’s Bubble 1.0 popped, but I was eventually very correct (I sold my dream house in November 2004).

The housing market is beginning to crater. I draw on “hands on” data from the Denver area because I can get “boots on the ground” due diligence accomplished. Denver is considered somewhat of a demographic “bellweather” for economic trends as they unfold. I don’t care what the media propaganda is reporting, in Denver housing sales are rapidly slowing, inventory is rapidly building and prices are falling. I’ve witnessed two $2 million+ homes in my area reduce their offer price 14% and 20% respectively shortly after their initial listing.

Ultra-high end resort areas are starting to get killed. Aspen is reporting that sales are down more than 42% in the first-half of 2016 vs. 2015: Aspen’s Sustained Nosedive. Same with Long Island’s Hamptons, where sales volume in East Hampton and Southampton plunged 53% and 48% respectively from a year ago: LINK.

Once the high-end wets the bed, the rest of the market follows very reliably and obediently.

My view is supported by the homes sales data for July reported by Redfin.com last week. According to Redfin, home sales (closings) fell 11% in July:  LINK.  Redfin of course concocts a ridiculous calculus to rationalize the decline, but that’s nothing more than a disconsolate effort to defer acceptance of the unpleasant but inevitable reality.

Perhaps most shocking in Redin’s report is the extent to which the bottom fell out of what had been some of the hottest markets in the country.  Year over year for July closings fell 46% in Vegas, 24% in Miami,  21% in Portland, 20-% in Oakland and 11% in Denver.

I’ve been focusing on the housing market in my weekly Short Seller’s Journal  because the homebuilder and related home construction stocks are no-brainer shorts.  It’s been my view that flippers/”investors” have been the majority of existing home sales volume reported this year.   I have a subscriber who is three decade-plus real estate professional in Denver who is sharing some great insider color on the market, something you will NEVER get from the National Association of Realtors:

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

I am selling a $309,000 condo and showing another buyer $300,000-$350,000 houses in the same part of Denver. Condos and houses of the same 1980’s age are not worth the same. Every time the condo and house of same square footage and age get the same price, the prices fall. Condos go down the farthest of anything.

I believe the flippers who are facing getting “stuck” with their inventory will start to panic and look to unload their “investments.”  Many of them are using debt to make their purchases.  This of course will hasten the downturn in housing. This is exactly how the end of the big Housing Bubble 1.0 was triggered.

The current housing bubble is the most extreme of the four bubbles I have witnessed since the late 1970’s.   Prices for new homes have moved above the prices of the last bubble. In many areas, existing home prices are now at all-time highs.  This is despite the fact that sales volume is roughly 2/3’s of the volume of the last bubble.  This activity is occurring amidst rapidly rising inventories.
The next downturn in housing will be worse than the last one because the Government Untitled1has aggressively stuffed as much mortgage debt as possible into the system with its 3% to no-percent down payment programs, reduced mortgage insurance requirements and by looking “the other way” on credit scores.

If the Fed hikes rate in September, as it incessantly insists will definitely possibly happen, it will be lights out for housing.  On the other hand, it can only take interest rates down 50 basis points to zero, probably will not enough stimulate sales because anyone with a high degree of monthly payment sensitivity has most likely already overpaid for their “dream” home.  When the Government introduced 0-3% down payment programs plus subprime programs.

Government Sponsored Mortgages Go Full Retard: 2008 Redux-Squared

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This is a note to me from one of my Short Seller Journal subscribers:

As a 20 year real estate agent, investor and wholesaler in Atlanta,  I’d like to add my comment to your analysis. I totally agree that things are not what they seem to be in housing.  I despised the NAR [National Association of Realtors] when I was a member because of their “it never rains” housing reports and their confiscatory attitude toward realtor dues and their subversive political activity.  I eventually gave up my agent’s license when they started forced PAC contributions in 2010.  Edward Pinto of the American Enterprise Institute told me that NAR is spending $55 million a year for lobbying on housing issues. The NAR never met a loan they did not like.

I’ve been working the Atlanta metro housing market since the early 1990’s. I can tell you that this time around is different in that the home buyers I’m seeing in entry level FHA neighborhoods are mostly “minorities” (some are refugees), and virtually every neighborhood in my general area northwest of Atlanta is being sold with 100% financing via USDA loans. There is NO equity in these neighborhoods, and most of the selling prices are as high or higher than 2006-07.  The mortgage fees and costs for things like PMI and funding fees are added into the payment along with ever rising tax and insurance payments. The outcome is not going to be pretty.

I do not know when exactly, but at some point, I’m going to make that massive killing in housing stocks that I missed out on in 2009. I knew that crash was coming as early as 2004, from reading mortgage data, but I did not think to short the home builders! This time I won’t miss.   Enjoy your work very much.

There you have it. That’s the truth from the trenches.  “The NAR never met a loan they did not like.”  But guess what?  All these 3% to no percent down payment mortgages are being subsidized by you, the taxpayer.  Instead of Countrywide originating subprime  nuclear waste and dumping it on Wall Street (and into your pension fund), this home finance scatology  is being sponsored by the Government through Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA.

Now Quicken – through Taxpayer-sponsored Freddie Mac – is offering 1% down payment mortgages (LINK) that also avoid the use of PMI insurance.  The PMI insurance is was a requirement for low down payment mortgages (below 20%), but the NAR and other PACs successfully lobbied to have this requirement removed.  The funds from PMI were put into a trust that was used to help cushion blow when low  down payment buyers defaulted.  It was a thin layer of protection for the Taxpayer.  Now that’s been removed.

Most of the homes being sold to actual buyers are now financed with Taxpayer funded subprime mortgages.  If you note in the article about the Quicken product linked above, it references that these are not considered “subprime” mortgages thanks to rule changes.  We can call a “nuclear bomb” a “snow cone” instead, but it’s still a nuclear bomb.

When a buyer closes on a low down payment house, the buyer is underwater on the mortgage after netting all the costs that are included.  Home prices are not going up as reported by Case Shiller and the Government.   Look around at all but the hottest markets and you’ll see a plethora of “price reduced” offerings.

This is going to get ugly again.  Interestingly, I run into lot of people who agree with me that what’s coming will be worse than 2008.   I reiterated a short on a big homebuilder less than two weeks ago that is down almost 9%.  Despite the general upward push in the SPX since mid-Feb, I’ve had several picks that are down double-digits on a percentage basis, including a mortgage company that’s down 15% since late March, a consumer durables stock down 17% since mid-April and an auto seller that’s down over 18% since early June. This is because the Fed is concerned with propping up the Dow and the S&P 500  for propaganda purposes.  But individual stock sectors are melting down.  The home construction and auto sectors will be a blood-bath.

You can access my research with these ideas here:  Short Seller’s Journal.  It’s a weeklyNewSSJ Graphic  report for $20/month delivered to your email on Sundays. In recent issues I’ve been reviewing past ideas that have not worked since mid-Feb because of the Fed’s market intervention. Many are better shorts now than back then, as conditions in the general economy have deteriorated since then.  I also provide at least one new idea per week.

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June Existing Home Sales Report: More NAR Promtional Propaganda

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It’s happening here too, NE Florida. Lots of inventory in higher priced areas (around $400k), lesser expensive areas are selling but at much reduced frequency. Lots of for sale signs out there and they’ve not come down. I see price reductions now, and still no traffic for sales. It looks exactly what I witnessed 7 years ago!  – reader comment – note:  a colleague of mine who lives on west coast of FLA said the same thing about his area
While the NAR was pleased to report a gain in May over April for its statistically brewed annualized home sales rate for May, it also revised lower its original “guesstimate” for April sales.  In other words, existing home sales are occurring at a slower rate than originally reported.  I would bet that in July when June’s number is reported that the NAR will revise lower May’s report.

The data is distorted due to the “seasonally adjusted annualized rate” calculation.  In theory, existing home sales should be higher than May last year because, with lower interest rates (manipulated by the Fed) and easier access to Government subsidized mortgages (FNM, FRE, FHA, VHA, USDA), the monetary and fiscal policy implementors running the U.S. have made it as easy for someone to buy a home now as it was during the big bubble.  I would argue that the “increase” in reported home sales is fully attributable to “seasonal adjustments”  which become exaggerated when the number is converted into an annualized rate.

Interestingly, the first-time buyer segment of the market took big dip from April.  I have suspected based on my observations of the Denver market that the largest component of homebuyers are investor/flippers.  The data confirm this.  First time buyers were said to be 30% of the buyers in May, down from 32% in April.  Historically, first-time buyers are typically 40-50% of the buying.
Also interestingly, the inventory of homes increased. I would suggest, based in inferences from the data, this is flippers/investors listing their homes.  I have noticed recently signs posted on busy boulevards around Denver that say “Wholesale fix-up homes available.”  This suggests to me that “investors” are scooping up homes ahead of flippers and looking to flip them into flippers.  This is how the peak of the bubble in 2006-2008 looked.
Finally, and perhaps most disconcerting, is the fact that the NAR is now pushing policy proposals which would make it easier for student loan borrowers to take down a Government-sponsored mortgage to buy a home. Nothing like piling more Taxpayer funded mortgage debt on top of an unmanageable amount of taxpayer funded student loan debt in order to let newly minted college-degree’d bartenders and waitresses buy a home…

Housing Sales Start To Tank As Suprime Auto Loan Delinquencies Soar

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Note:  For the record, I am expecting the possibility that the new homes sales report for February released today will show an unexpected spike up.  For the past several months, there’s been what I believe to be a pre-meditated pattern in which the existing home sales data series and the new home data series move in the opposite direction.  Let’s see if the trend continues.

The existing home sales data series has become as erratic and unpredictable as the Census Bureau’s new home sales report.  One can only wonder about the reliability of the National Association of Realtors reporting methodology when its Chief “Economist” repetitively states month after month that “job growth continues to hum along at a robust pace.”  Any economist who uses the Census Bureau’s monthly employment report as their evidence that the U.S. economy is producing meaningful, income-producing jobs is either just another propaganda mouthpiece or is of questionable intelligence.  Either way a statement like that is highly unprofessional.

You must be wondering why I’m connecting home sales to the recent data which shows that subprime auto loan delinquency rates are soaring (here and here).  Let me explain.

All cash sales of existing homes in February were reported to be 25% of all sales in February, down from 26% in January.  This means that 75% of existing home sales (93% of new home sales) are dependent on mortgage financing.  The FHA has been underwriting 3.5% down payment mortgages since 2008.  3.5% down payment mortgages are nothing more than sub-prime mortgages “dressed in drag.”  The FHA’s share of the mortgage market soared from about 2% at the beginning of the 2008 to around 20% currently (plus or minus a percent or two).  Fannie Mae and Freddie Mac have been issuing 5% down mortgages for quite some time and lowered the down payment to 3% in early 2015.

If you require a 5% or less down payment to buy a home, you are a subprime credit risk, I don’t care what your FICO score it.

First time buyers represent about 30% of all existing home sales.  A good bet is that the first time buyer segment almost exclusively uses the lowest down payment possible to buy a home.  RealtyTrac issued a report in June 2015 which showed that low down payment purchases hit  a 2-year high in Q1 2015 and accounted for 83% of all FHA purchase mortgages.  Understandably RealtyTrac has not updated this report.  My bet would be that somewhere between 30-50% of all purchase mortgages were of the low down payment variety, or clearly de facto subprime quality.

The Wall Street Journal published an article last year which discussed the rising trend in low to no down payment mortgages:  Down Payments Get Smaller.

This is where soaring subprime auto loan delinquencies come into play.  To the extent that a potential home buyer is behind on his auto loan, it will impede his ability to take out a mortgage of any down payment variety.  In fact, I believe that the U.S. financial system has hit the wall in terms of the amount of debt that can be “absorbed” by potential borrowers. Auto loans and student loans outstanding hit new record highs daily, with both well over a combined $2 trillion outstanding.   In my opinion, this is why existing home sales dropped 7.1% from January, more than double the 3.1% decline forecast by Wall Street.

The National Association of Realtor’s Chief Clown attributes the big drop in home sales in February to “affordability.”  But this is statement seeded either in ignorance or fraud.  Forget the Case-Shiller housing price comic book.  Nearly every major MSA has now entered into the continuous “new price” vortex.  This has been going on Denver since last June.  I’m getting reports from readers all over the country describing the same dynamic in their markets.  This problem is especially acute the high end.  Besides, every mortgage sales portal in existence markets a calculator that take your monthly income and calculates how much house you can “afford.”  Price has nothing to do with ability to get approved for a mortgage.

Speaking of “affordability,”  the cost of financing home dropped to 3.66% in February, it’s lowest rate since April 2015.  In other words, the cost of buying a home actually became more affordable in February.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion”  – Ludwig Von Mises.  The Fed and the Government prevented the collapse of the system that was set in motion by the housing/mortgage market in 2008.  As Von Mises stated, “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion , or later as a final and total collapse of the currency system involved.”

I believe that it is quite likely that the Fed’s ability to push further credit expansion has reached, or is close to, its limits.  The soaring delinquency rates of auto loans and a housing market which is likely beginning to tip over now reflect this reality.

I was early in 2004 when I predicted a collapse in the housing market.  I underestimated Greenspan and Bernanke’s ability to expand mortgage credit.  I was once again early in predicting the demise of the current housing bubble.  Again, I underestimated the Fed’s ability and the Government’s willingness to stuff the average American up to his/her eyeballs in debt.  Regardless of flaws in predictive abilities with regard to timing, my overall analysis materialized in 2008 and it’s a good bet that it’s coming to fruition once again – only this time it is likely that the Fed will be helpless in preventing the inevitable.

The NAR’s Existing Home Sales Report For January Is Not Credible

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The 14 percent quarterly decrease was fueled primarily by a 24 percent quarter-over-quarter decline in purchase originations — the biggest quarterly drop in purchase originations in more than five years, since the third quarter of 2010.  – RealtyTrac

EVERYTHING EVERYWHERE that is used to further intended policy is adjusted that way to the nth power.   Inflation, employment, housing…Our world has become so delusional and a house of mirrors that it’s impossible to rule out anything.  Policy today should be called:  NHB (no holds barred).   – A friend and colleague of IRD

The National Association of Realtors reported their statistical estimates for January existing home sales today.  According to the NAR, home sales on a Seasonally Adjusted Annualized Rate (SAAR) basis increased .4% in January vs. December.  The NAR claims that the same metric shows an 11% year over year increase for January 2016 vs. 2015.

I’ve never understood the purpose of using an annualized rate number in order to report monthly economic data.  That does not make any sense whatsoever.   To begin with the NAR uses data samples that it describes as “representative.”  However, as anyone who has taken elementary statistics in school knows, all data sampling is highly vulnerable to sampling errors and sampling bias.  To the extent that the data pool for a monthly time period contains errors, annualizing this data compounds the error by a factor 12.

And then there’s the seasonal adjustments.  The NAR will not share its seasonal adjustment algorithms with the public.  The seasonal adjustments further pollute the data samples and therefore further corrupt the annualized metric.

However, we can test the NAR reported numbers using some highly correlated comparative reports.  It just so happens that, understandably,  there’s a high correlation between between purchase mortgage originations and existing home sales.  A week ago RealtyTrac released a report that showed U.S. residential purchase loan originations dropped 24% in the fourth quarter of 2015:   RealtyTrac.  This was the biggest drop in purchase loan originations in more than five years.

You might ask what mortgage purchase loans in Q4 have to with the existing home sales report for January.  Good question.  Existing home sales are based on contracts that close (escrow closes and title changes hands) – as opposed to new home sales which are based on contracts signed.   Unless an existing home sale is an all-cash transaction, it takes at least 30-60 days for a contract to close once its signed.  This means that up to 2/3 of the contract closings in January were more than likely based on contracts signed in November and December.  Mortgage originations for those months should move in lock-step with contract signings.

How is it possible that existing home contract closings increased slighly over December or 11% year over year for January when mortgage purchase originations plunged 24% during the period of time that NAR claims that contracts were being signed and converted into closings?   In fact, per the NAR, all-cash transactions declined slightly in January, which means that the use of mortgages was a slighly greater part of the sales mix for contracts that closed in January 2016 vs. January 2015.  In other words, it’s almost a statistical impossibility that home sales were up 11% for January 2016 vs. January 2015 or even vs. December given the huge decline in mortgage purchase originations.

Anecdotally, the market is breaking down here in the DC area. Homes are being listed and them removed after too many price reductions. If a home does sell, it’s probably a foreclosure that selling 33% below its 2005 price like this one:  Zillow LINK  – Reader comment

The other problematic assertion by the NAR is a claim of low inventory.  I know from the new listing notifications I receive daily for the Denver area that new listings have been soaring since the early fall, especially in the over-$750k price bucket.  Not only that, but the “price change” notifications have been accelerating since the late fall.  I have received similar reports from readers around the country.  The way the NAR calculates “supply,” when sales are overstated, it creates a downward bias in the “months inventory” metric. The annualization of the data exacerbates the problem.

Given the rapidly deteriorating economic condition of the U.S., a claim that housing sales Untitledcontinue to increase is simply not credible, with or without the verification provided by the mortgage origination data.  This is further reinforced by the rise in the cost of buying a home relative to the deterioration in household real income. We found out earlier today that, according to the Case-Shiller housing price index, the price of a home continues to climb.  How is it possible that more people are supposedly buying increasingly expensive homes with declining incomes?

The fraudulent data and lies being broadcast by the Government and various industry associations like the NAR are just silly given the increasing divergence between the statistically manipulated data and the underlying reality.   It’s funny because I play tennis weekly with a successful mortgage broker in Denver.  He is looking to move out the business and into something else because he sees the writing on the wall for the housing market…

This is the type of analysis that is the foundation for the Short Seller’s Journal.  When I pick out short-sell ideas, I don’t look for stocks that will go down just in correlation with the market, I look for stocks that will get demolished when the market moves lower.  To do this I spend several hours a week looking not just a p/e ratios and business models, but I also look “under hood” at company financials and industry fundamentals.  I am also going to roll out a bi-monthly Mining Stock Journal and SSJ subscribers will be able to subscribe to the Mining Stock Journal for half-price.

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A Warning Signal For The Housing Market

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

PennyMac (PFSI) is a mortgage finance company that describes itself as  a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market.   The stock has been getting crushed and insiders have been dumping shares:

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The graph above (click on image to enlarge) shows PFSI vs. the BKX banking index.  Other mortgage finance stocks have been getting hammered as well.  That steep decline that started on Dec 24 in the graph above was not accompanied by any news triggers.  In fact, PFSI signed a new “warehouse finance” credit line with Credit Suisse for $100mm at the end of the year.  That should be great news if you are a housing and mortgage finance perma-bull.

When stocks decline steeply with no related news events to set-off the price-drop – and when one of the largest individual holders,  Leon Cooperman, is unloading shares – it’s the market’s way of signalling problems not yet recognized by the peanut gallery.  PFSI reported its Q3 earnings on November 4 and with a cursory glance they looked to be what the market expected.  The stock did not do anything unusual.

The action in PFSI’s stock and in some other related mortgage finance and real estate stocks tells me that the “invisible hand” in the market is signalling a significant downturn coming in both home sales volume and mortgage finance volume.  Per the invaluable work of John Williams (Shadowstats.com), when you remove the statistical manipulation and annualization of the existing home sales report for December, it turns out that existing home sales evaluated on an unadjusted monthly basis for the fourth quarter was down 20% from the third quarter.  That’s  not something that you’ll hear about or read in mainstream media or on venues like Seeking Alpha or Realmoney.com or the Motley Fool or Business Insider.

That is what I believe the market is seeing and is why stocks like PFSI are taking a beating outright and relative to the overall banking sector.   Anecdotally, I just got a call from a friend who told me house that would have sold for $620k on his block last year was put on the market two weeks ago for $599.  The neighbors all thought the price was too low.  Two weeks later, today, the price was lowered to $579.  I bet that price will be lowered at least once or twice more before it sells.  And this is an area that was still seeing bidding wars last summer.

UntitledSometime in the next few weeks I’ll be featuring another mortgage-related stock in my Short Seller’s Journal that still has a LONG way to fall before it gets back to its 2008 great financial crisis, pre-QE price.  My picks this week are significantly outperforming the market.   SHORT SELLER’S JOURNAL

A Quick Note On Today’s Existing Home Sales Report

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

What about the biggest rise in existing home sales on record in December? These guys are offending my sensibilities. By virtue of all the fake statistics and bogus market action, there has to be something seriously wrong right now.  –  John Embry email to IRD

Existing home sales are based on a sample estimate of contract closings.   The actual “sale” took place when the contract was signed 30-45 days ago.  The headline report is based on a “seasonally adjusted annualized rate.”  The big farce about statistics, away from the obvious fact that “seasonal adjustments” are a polite way to say “statistically manipulated,” is that the metrics reported in terms of percentage changes can make an economic report sound a lot better than the underlying reality.

The underlying reality in today’s report is that allegedly a technical glitch cited by the NAR pushed some closings from November into December and therefore artificially depressed the November number and  artificially inflated the December number.  This is only part of the explanation for the 14% seasonally adjusted annualized rate of increase for December vs. November.   The balance of the 14% seasonally adjusted annualize rate metric is most likely attributable to the “seasonally adjustments” applied to the sample data.  It’s analogous to taking the scraps of pig of the slaughterhouse floor and putting these scraps though a grinder to produce “sausage.”

By the way, does anyone find it a bit suspicious that a “seasonally adjusted annualized rate” metric is used to describe what may or may not have occurred during one month? Think about that.

Notwithstanding this statistical smoke and mirrors, pending home sales for November dropped 1% vs an expected rise of .7%.  Pending home sales are contracts signed, most of which evolve into closings, which become existing home sales.  Some of this decline in pending home sales should have been reflected in December’s existing home sales – in other words, it calls into question the credibility of the existing home sales report.

Furthermore, the November pending home sale number should translate into lower closings, i.e. existing home sales, for January.  That latter assertion relies on an unwillingness of the NAR to completely lampoon the statistics for January’s report- an assumption that may be highly naive based on the degree to which the NAR has been adulterating the statistics for at least the last year.

One last thing.  If you find yourself wanting for some intellectual entertainment this weekend, compare the commentary from the NAR’s Larry Yun in the Pending Home Sales report and his commentary in the Existing Home Sales report.   It epitomizes the phrase, “through the looking glass.”

The homebuilder stocks are rebounding right now on the back of that rigged existing home sales report.  One of the featured stocks in this week’s report will either be a homebulder or a homebuilder supplier.  The last h/b supplier I featured is now up (i.e. down in price) over 13% from the 12/7/15 report.  The last h/b I featured 2 weeks ago is now down 8%.  You can access my Short Seller’s Journal here:   SSJ Subscription