The Housing Market Is Starting To Plunge

Investment Research Dynamics

Let’s start with real market data before we tackle and Un-Spin the Census Bureau vomit. Home sales in Southern California dropped to their lowest level in 7 years for the month of November.   They plunged 19% from October to November. Since 1988, the average decline from Oct to Nov is 8%.  This is actual transaction data and not estimated, adjusted and annualized drool coming from the Government or a real estate pimp organization like the NAR.  Here’s the LINK.

As for today’s housing starts/permits data for November from the Census Bureau.  The highly polished headlines reported that housing starts were down only 1.2% from October, with permits down 5.2%.  HOWEVER, please note that this is “seasonally adjusted and annualized” rates.  We have no idea what kind of absurdities are built into the “seasonal adjustments.”

BUT, if you look at the unadjusted data for November 2014 vs. November 2013, you find that actual starts dropped 7.5% and permits were down 5.5%.   This is the cleanest way to look at the numbers because it eliminates Census Bureau statistical manipulation and it is is not an annualized rate.  Note:  to the extent there’s errors in the “seasonal adjustments,” annualizing the number compounds that error by a factor of 12.  Here’s the data link from the Census Bureau if you want to see what I’m looking at:  LINK

The homebuilder stocks are going lower.  You can ignore reality, but you can’t ignore the consequences of reality. Despite 30-yr mortgage rates below 4% and a slight easing of FNM/FRE credit standards, mortgage purchase applications and sales are dropping.  Here is the link to my latest homebuilder short-sell report:  This stock is already down over 8% since I first published the short-sell recommendation on December 4th.  It’s going lower.  I would short the bonds too if you can locate a borrow.

Don’t take it from me, here’s some actual market data from around the country (sourced from The Housing Bubble Blog):

Orlando:    Orlando-area home sales have slowed, the inventory of house listings is up, houses are taking longer to sell and sellers have less negotiating power than they did a year ago, according to a report.

Boston:   Everyone knows that the Luxury Glutpocalypse has hit Greater Boston: too many new higher-end apartments, too few tenants for them, and a lot of gobsmacking incentives to try and right the market ship. You can see that the decreases have been steepest in areas that have seen some of the briskest development of luxury apartments (Back Bay, downtown Boston, Chinatown).

Minneapolis/St. Paul:   A sluggish November for home sales and stagnant fall inventory has given buyers the upper hand in the Twin Cities housing market. ‘There’s kind of a hangover of inventory from the fall that isn’t selling.

Housing market guru, Robert Shiller:   “Historically, houses have not done well as investments. They haven’t really gone up much in value in the last 100 years. And on top of that, they’re a nuisance,’ he said. ‘You have to take care of them.”

The zero-interest policy of the U.S. Government/Fed has caused a massive misallocation of capital into a massive oversupply of rental buildings (I see this all over Denver) and single-family homes.  All of the homebuilders for which I have published research reports have loaded up their inventory with spec homes and have used mostly debt to finance the binge.

The next event will a massive “purge.”  Take advantage of the purge by shorting these homebuilders before every hedge fund out there looking for positive short-side alpha jumps on this trade.  You can access all my homebuilder short reports here:   Short The Homebuilders.

This is a volatile sector but there’s a lot money that can be made with prudent capital management and use of calls and puts to help manage the volatility.  All of my reports have a section which discusses both capital management/trading and options strategies.