Further Deterioration In Housing Market Fundamentals – Dave Kranzler

The construction rate for single-family homes is about 40% below its long-term average, but even that depressed pace may be too high given that vacancy rates haven’t dropped much from post-housing-collapse highs  - Jed Kolko, chief economist, Trulia.com

I have been making the case for over a year now that the fundamentals for the housing industry, when you peel back the statistically manipulated headline vomit we’re fed by the National Association of Realtors, Census Bureau, National Association of Homebuilders and Wall Street, have been deteriorating for the better part of the last 18 months.

These two charts from Trulia show the vacancy rate in this country for single family homes and the home ownership rate for 18-34 yr olds:

I’m sure many of you were not aware that 9 out of every 100 homes in this country is vacant. It’s part of the “shadow inventory” that housing market promoters hide from view as much as possible. Even more stunning is the decline in home ownership rate for the under 35 demographic. Regardless of what so-called experts want to attribute this to, that graph is highly correlated with the declining labor force participation rate for the under 35 demographic. This is the first-time buyer demographic. Historically the first-time buyer is 40% of all home sales. Currently its about 28%. Everything in the housing market hinges on this the first-time buyer’s ability and willingness to buy a home.

Now that the investment buyer/flipper is fading from the scene, the housing sales numbers – stripped of the statistical manipulation – should start to tail off pretty quickly.  I subscribe to an email filter on REColorado that sends me daily emails of new listings and price reductions in central Denver.  Every day it seems new listings and price reductions are piling up.  Sure, anyone who needs to sell a home right now needs to lower the price. But other than out of necessity, now is the worst possible time of the year to list a home for sale, right ahead of the major fall/winters holidays.

My theory is that some of the sellers have to sell, for whatever reason, and the others who are listing have an aggressive real estate agent who has convinced them to “take advantage of the market now.”  Whatever the case may be, demand is declining.  And it’s declining despite the fact that 30-yr mortgage rates are close to all-time lows.

There’s not better affirmation of my view than investment returns.  Here’s graph of the 1-yr Dow Jones Home Construction Index:

The yellow circle on the right side of this graph highlights the “death cross” the DJUSHB at the beginning of September, when the 50 day moving average crosses below the 200 day moving average. It means that sellers are a lot more aggressive selling their shares than buyers are at buying. In fact, I would argue that the bounces you see represent short-covering rallies, as the sector has a somewhat high short interest ratio.

The white line connects the big red bar, which is a big volume spike, with the drop that began after the last big short-cover bounce.  That’s fresh selling and shorting.  Currently, the DJUSHB, as I suggested it might, has bounced up to to its 50 day moving average (yellow line) after being very oversold technically.  But note the declining volume bars in the white circle on the lower right.  The bounce is losing momentum.  It might go a bit higher, but when it turns back down, the DJUSHB will likely trade below the recent low at 445.

The best way to express a bearish view in the housing market is to short the homebuilder stocks.  I have four reports posted in my Homebuilder Reports research section.  They are listed in order from most recent to oldest.  All of them but the most recent one – posted right as this bounce started – are in the money.  I also include an options trading section in the reports which outlines how to use puts and calls if you don’t feel comfortable shorting stocks.

While this current mini-bounce in the homebuilders may have a little more ways to run, it is giving us a great opportunity to add to existing short positions or establish new ones. Finally, I believe – because of the amount of debt that has been accumulated by this company – that the company in my very first report (at the bottom of the Homebuilder Reports link) will eventually go bankrupt.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.

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