The homebuilders have had near-parabolic run-up in their stock prices. This is not atypical of the sector, which is twice as volatile as the overall stock market because of the extreme amount of debt embedded in homebuilder balance sheets and the relatively high short-interest in the shares. Incredibly, the homebuilder stocks can’t even get back to within 50% of their peak prices in 2005 at a time when the S&P 500 sets a new record every day. That fact alone in and of itself reflects to relatively poor fundamentals underlying the housing market.
Of course, the homebuilders continue to pile on debt and inventory just as the slightly reflated housing bubble is popping. I’ve updated the Q3 results for one of the homebuilder reports I published in October. The Company continued to burn cash despite having its best sales quarter since the big housing bubble popped. It also piled on more inventory and its cancellation rate spiked up to 20% in Q3 from 17% in Q2. Perhaps most telling is that as soon as the restricted period for insider stock transactions was lifted after the release of its earnings, 13 insiders unloaded close 150,000 shares. There were no buyers. You can access this updated and comprehensive report here – it’s the first report listed: Homebuilder Stock Reports. This company has 3.5x more debt than it had at the peak of the housing bubble. This is an even better short-sale candidate now than it was at the beginning of October. And now the Fed is no longer buying billions in mortgages every week.
Yesterday I saw an article in which the National Association of Realtors (existing home sales pimps) stated that rent increases in 2015 will outpace inflation. Funny because the NAR’s chief
pimp economist clearly has not surveyed the rank and file. I know for a fact in Denver that the available inventory of both homes and apartments is rapidly escalating and rents are softening up. I expect this trend to accelerate over the next several months as several huge rental buildings come on-stream here. I have heard similar accounts from several readers all over the country.
As for real existing home sales, where “real” is based on actual closing data as opposed to the NAR’s data samples put through a data sausage maker and then converted into an annualized rate, here’s the latest weekly update from DataQuick (click to enlarge):
Case-Shiller reported today that its index for September showed its first month to month decrease since November 2013. It noted a “broad-based slowdown for home prices.” Please note that the C-S index is lagged by two months and it overweights the gains realized by distressed re-sales by flippers. In other words, standard existing home sale transactions likely occurred at even bigger declines than registered by C-S. This assertion is confirmed by the graphic above, which incorporates the most recent 6 weeks AND by the report I posted on this blog which showed that in July, in most major markets, over 30% of all listed homes were reduced in price during that month. I know that trend has continued, at least in Denver.
Here’s some regional color from readers:
In high end New Canaan CT – Virtually every house that is purchased is torn down and replaced by a McMansion built to the limits of the setbacks of the property. Massive houses, with no yards. Million dollar homes fall to the ground within hours of closing and three or more million dollar homes rise over the rubble. There are entire neighborhoods with “for sale” signs in the yards, and still the insanity of overbuilding continues.
Phoenix, Az. – Here many houses are sitting and not even a single bid. I have heard form several people their second investment property has not had one bid, so they are considering renting them out. House prices are being cut 2-7% by the sellers.
I live right outside Washington DC – in one of the highest average median family income counties in the US (Fairfax county). I have good real estate contacts in the area and I am hearing there’s entire streets now of $1 million -1.5 million houses that were built in Vienna, VA on spec by developers that have been unsold for close to a year now despite gimmicks the home builders are trying. So the DC Metro area is being massively overbuilt.
The economy is starting to tank hard and that fact is becoming more apparent in the latest data. This includes: 1) Probably the #1 indicator is the price of oil. It’s plunged 35% since mid-July, including nearly $2 today despite announced production cuts by OPEC – this is due to a rapid fall-off in demand 2) 30-year Treasury yields plunged below 3% today for the first time since the Fed initiated Q3 to prop up the sagging economy in 2012; 3) The highly rigged consumer “confidence” metric released today missed expectations by a mile and fell to its lowest level since June; 4) In its “business outlook” survey today, Markit reports that business “optimism regarding future activity slipped to its lowest level since the survey began in 2009.”
Those are just few or the indicators telling us the economy is starting to contract pretty quickly. I can assure you that, to the extent that economic activity is dropping, home sales will slow down even more quickly. Certainly those hundreds of thousands of car buyers who are now becoming delinquent on their growing pile of subprime auto loans – LINK – will not be in the market for a new home or a move-up purchase. In fact, many of them will soon become delinquent on their rent or mortgage payments as well.
The housing market is on the cusp of falling off a cliff. I fully expect that, after the holidays are over, there will be a rush of new listings all over the country. Obviously per my post yesterday we are already seeing an avalanche of high-end home listings. The weight of that high-end inventory is going to push the entire market a lot lower. And I also expect foreclosures to ramp up again. But, what will happen if the big hedge funds who loaded up on buy-to-rent-to-sell homes begin to dump en masse? That’s typically how a lot of hedge funds operate. If a trade goes bad, they dump. I made that prediction about a year ago and I expect to see that begin to happen as well.
Every one of my four homebuilder short sell ideas are an even better play now than they were when I published the reports. Every time I recommend shorting this sector, I have been clear about stating the necessity of saving capital to add to your positions if the market goes against you. The best gains are made not by trading, but by building a position slowly and patiently waiting for the fundamentals to break the stock prices. It will happen quickly when that reality sets in.
All my reports contain a quick summary page, a broad overview of the housing market and a section that discusses trading and stock options strategies. You can access all my reports here: Homebuilder Short Reports.