Tag Archives: subprime bubble

The Housing Market Is Heading South

A subscriber from Canada emailed me last night about the Canadian housing market: “Toronto and Vancouver sales down 40% and 30% YoY respectively. Prices are still up in Vancouver but down 14% in Toronto. I don’t know how prices stay up if the volume continues to trend down. Canadians are even more levered than Americans I believe. This is going to get ugly before it’s all over.”

The only part I disagree is Canadians being more levered than Americans. The average first time buyer in the U.S. can buy a Fannie/Freddie guaranteed mortgage financed home with zero down as long as the credit score is north of 570. “Zero down?” you ask. Yes zero down. Now included in the down payment is any amount of concessions tossed in by the seller. Soft dollars. Fannie and Freddie are already asking for “bail out” money from the Government after posting big losses. Fannie posted a $6.5 billion loss in Q4. How is that possible if the housing market is healthy? It’s the sign that the average homebuyer is overleveraged.

Now I’m hearing ads all-day long (sports radio) for 100% cash-out refis, home equity loans, purchase and refi mortgages for buyers who don’t even have FICO ratings. “Past bankruptcy” is okay. “Simon Black” (his nom de plume) wrote a piece the other day accusing the bankers of being idiots for letting the subprime debt issuance get out of control again. He’s wrong. It’s the Taxpayers who are idiots for rolling over every time the Government bails out the bankers. Quite frankly, if I lacked morals and ethics, I’d rather be on the bankers’ side of this trade. They make massive bonuses underwriting all of the nuclear waste and then pay themselves even bigger bonuses when the debt blows up and the Taxpayers bail them out. Who’s the “dumb-ass,” Simon?

Homebuilder stocks are a low-risk shorting proposition.
A subscriber asked me about the 10yr Treasury yield, which for now appears to be headed lower, and if a significant drop in the 10yr yield would stimulate home sales.

That’s a great question. Mortgage rates are a function, generally, of the 10yr Treasury yield and risk premium. As the risk of repayment increases, mortgage spreads increase. The LIBOR-OIS spread reflects the market’s rising fear of repayment risk.  I just noticed that the 30-yr mortgage rate at Wells Fargo – 2nd largest mortgage lender – has not changed much in the last few weeks despite the decline in the 10yr yield.

Part of my argument is that the general credit quality, and ability to make any down payment, in the remaining pool of potential first time buyers is dwindling. In other words a large portion of under 35’s, who make up most of the 1st time buyer cohort and who are in the “pool” of potential homebuyers, do not have the ability financially to support home ownership. In the last 2 months, the percentage of 1st time buyers in the NAR’s existing home sales report has started to decline.

New homes on average are more expensive than existing home resales. This fact makes my argument even more compelling. We saw this in KBH’s FY Q1 2018 numbers, which showed flat home deliveries vs Q1 2017. Homebuilders are also getting squeezed by commodity inflation (lumber and other materials), which lowers gross margins.

I saw a study that showed the annual rate of change in real wages, where “real wages” is calculated using a “real” inflation rate, is declining. Furthermore, most of the nominal wage gains are concentrated in the upper 20% of the workforce. The lower 80% of wage-earners are experiencing year over year declining wage growth.

The conclusion here is that a majority of those in the labor that would like to buy a home can not afford to make the purchase. In fact, a study by ATTOM (a leading housing market data aggregator) showed that the average worker can not afford the median-priced home in 70% of U.S. counties. The relative cost of mortgage interest is only part of this equation, which means lower mortgage rates based on a falling 10yr yield would likely not stimulate home buying at this point.

I think the only factors that can possibly stimulate home sales would be if the Government takes the FNM/FRE down payment requirement to zero and directly subsidizes the interest rate paid. I’d be surprised if either of those two events occur.

P.S. – just for the record, Lennar’s real earnings yesterday were substantially worse than the headline GAAP-manipulated EPS that ignited the rally in the homebuilder sector. I’ll be reviewing LEN’s numbers in Sunday’s Short Seller’s Journal and showing why the reported GAAP numbers were highly deceptive. I’ll also suggest ideas to take advantage of this knowledge.

The Foul Stench Of Desperation

Something is really wrong behind the scenes.  The insiders are exhibiting an extreme degree of desperation to keep the price of gold and silver from trading freely and to keep the stock market from plunging.   Every time the S&P 500/Dow are in a free-fall, one of the big HFT electronic commications networks (ECNs) mysteriously “breaks” (source: zerohedge):  click to enlarge


Today the S&P 500 was down 16 points and falling quickly. Then the BATS ECN announced that it had to suspend trading in all of its trade routing systems to the NYSE. It just so happens that BATS is one of the largest, if not the largest, electronic communication networks in the world. This happens every time the stock market goes into cliff-dive mode. How come it NEVER happens when the S&P 500 is going parabolic to the upside?

The economy is starting to fall apart.  The plunging price of oil is just one indicator.  Retail sales down nearly 1% two months in a row with one of the months being December, which is historically the best month of the year for retail sales.  DOWN 1%.   Declines in retail sales are not very common – especially back-to-back monthly declines just under 1%.  It means that consumers are not buying.  They are not buying because they have run out of money.

Revolving credit balances have been rising steadily now since 2011.  The rise has begun to accelerate (source:  St Louis Fed, click to enlarge):


Contrary to popular Wall Street myth, consumers don’t take out an increasing amount of high-cost credit card debt when they feel “good” about the economy. Since the mid-2000’s people have been using credit card debt increasingly to pay for necessities:  food, gasoline, etc. Many will even put their monthly mortgage payment on their credit card. This is part of the dynamic that led to the credit market collapse in 2008.  Banks are all too willing to issue them to everyone with less than stellar credit ratings because they can charge 15% (current average APR) on money for which they are borrowing from depositors for almost 0%.

How do we know that consumers don’t “feel good” about the economy?  Because if you review all of recent macro economic surveys, you’ll find that they all have sub-indices which measure “sentiment” or “expectations.”  Those sub-indices in particular are plunging.

I don’t know how much longer “they” can keep up this absurd charade, but I know when that when they lose control the collapse will be spectacular.

Subprime Consumer Debt Soars to 7-Year High

This will not end well:   “The trend stems from lenders and investors seeking high yields in a low-interest rate environment. So it’s no wonder that total household debt rose $306 billion, or 2.7 percent, in the fourth quarter from a year earlier to the highest level since 2010.” (Newsmax)

Subprime lending as a percentage of total consumer lending is now close to where it was right before the financial collapse of 2007 (click to enlarge):


Of course, if you blow away the Orwellian smoke from the Graham-Dodd legislation, U.S. lenders of all varieties are not subject to less scrutiny and oversight than before the de facto financial collapse in 2008.

The Fed’s 6-year ZIRP policy has created a situation in which banks and other financial institutions are now taking excessive risk in order to pick up yield:

Lenders’ interest in customers who were the hardest hit by the financial crisis reflects…firms’ desires to take more risks at a time when ultralow interest rates are depressing profits.  (Wall Street Journal)

This is setting up the next catastrophic systemic financial melt-down and will be the excuse the Government/Fed is looking for to roll out a QE4 program that will have to be larger than the last time around…

In connection with this information, THE best way to play a subprime debt blow-up is to short Amazon.com (NASDAQ:AMZN). AMZN plunged from $407 to $284 at the beginning of 2014 thru early May. It has been unable to hit a new all-time high despite the SPX hitting new highs nearly every day now. I have a report available that will explain exactly why AMZN is eventually going to hit the wall:   AMAZON.CON