High End Housing Is Going To Get Slaughtered

The title quote is from a colleague who has been monitoring the upper-end housing areas in the metro-Denver area every day for the last year.    Neighborhoods in which there is a preponderance of homes valued over $750k have been flooded with listings.   Here’s a perfect example (click to enlarge):

The areas marked off are high-end neighborhoods adjacent to the Denver Tech Center, which hosts many Denver-based tech and energy companies.  It’s also adjacent to one of the largest hospital/medical services complexes in the metro-Denver area.  My colleague said that six months ago there was not much for sale in these two areas and homes sold quickly.   As it turns out, Toll Brothers builds a lot of new homes and has a lot of available inventory in this area as well.   Toll is one of my favorite short plays.

Here’s another great example:

This area is Cherry Hills Village.  It’s one of Denver’s highest end areas and is seeded both in old and nouveau money.   Peyton Manning bought a home in this area, for example, after signing his $95 million contract with the Broncos.  I have a friend who moved here from Australia and he had been looking around in this area.  He said he was stunned by the number of new listings in just the last 6 weeks.   He’s in no rush to buy at this point.   But you can see there’s a plethora of homes in excess of $2 million on the market.  And they are just sitting there.  This is maybe a 5 square mile area with a big country club and big private school plus a lot nature preserve areas.  In other words, what you are looking at is a significant percentage of homes in the area are currently on the market, many of them recent listings.

Although right now is the worst time of the year to the list a house, I am seeing more “for sale” and “for rent” signs every day in my area (central Denver).  I had a conversation with the leasing agent for my building yesterday (I live in an new, upscale apartment building) and she said the Denver apartment rental market is becoming very soft because lots of supply is coming on-stream and competing buildings are lowering their rent.   I saw this coming several months ago and wrote about the impending deluge of apartment inventory about to hit the Denver market.

And it’s not just the Denver market – it’s nationwide:  “Hearing The Word ‘Oversupply’ Just About Everywhere:”  “The dynamic has changed just about everywhere, said Martin Millner, an agent with Coldwell Banker Hearthside in Yardley. ‘There isn’t tremendous buyer demand, and yet more houses are going on the market,’ he said. The high-end market dynamic is changing as well, Millner said. He repeated an observation by a friend of his who sells more expensive houses that ‘it is the worst he’s seen in 35 years.’”  Here the article:   LINK

Investment Research Dynamics

I have always suspected that this latest housing bubble reflation would pop because of a massive oversupply of high-end homes.   The best signal of this dynamic was the solicitation one of my colleagues received from Toll Brothers in Scotsdale (he’s in Chicago with a second home in Phoenix) which offered to pay up $2k in travel expenses if he bought a new Toll home in Arizona.  This of course, even if he were interested, would require that he sell his current Arizona home – something which would be difficult to do now.

The big housing bubble popped when the low/mid-end blew up from subprime mortgages.  This time around the high end is going to push the entire market lower.  At some point we are going to see delinquency and default rates pick up considerably, especially as an increasing amount of Adjustable Rate second mortgages begin to reset this year and next (from the 2005-2007 era).   Remember those?   You’ll remember it soon enough if have one when your monthly mortgage payments all of sudden spike higher.

One last point of note:  it was reported last week that October saw “double digit increases in foreclosure filings”  (LINK).   This is just the beginning…

If you are already short the homebuilders, now is a good time to add.   If you are not short the homebuilders but are thinking about shorting the sector, I have four great ideas here:  Homebuilder Short Sell Reports.

Nothwithstanding whatever trumped up data the Census Bureau vomits at us on Wednesday with it’s farcical new home sales report, the market is headed for the cliff and there’s a lot of money to be made shorting the homebuilders.