Housing Starts Crash - Sales And Prices Will Follow

Investment Reserach Dynamics

In many areas of the country prices are already down 5-10%.   I know, you’re going to say that offer prices are not reflecting that.  But talk to the developers of NYC and SF condos who are trying to unload growing inventory. Douglas Elliman did a study of NYC resales released in October and found that resale volume was down 20% in the third quarter vs. Q3 2015.  A report out in November published by Housing Wire said that home sales volume in the SF Bay area fell 10.3% in the first 9 months of 2016 vs. 2015. Price follows volume and inventory is piling up.

NYC led the popping of the big housing bubble.  It will this time too.  Prices in the “famed” Hampton resort area down 20% on average and some case down as much as 50% from unrealistic offering prices.  Delinquencies and defaults are rising as well.  While the mainstream media reported that foreclosures hit a post-crisis low in October, not reported by the mainstream media is that delinquencies, defaults and foreclosure starts are spiking up. Foreclosure starts in Colorado were up 65% from September to October.

Housing starts for November were reported today to have crashed 18.7% from October led by a 44% collapse in multi-family starts.  No surprise there.  Denver, one of the hottest marekts in the country over the last few years with 11k people per month moving here, is experiencing a massive pile-up in new building apartment inventory.   I got a flyer in the mail last week advertising a new luxury building offering 2 months free rent and free parking plus some other incentives.   Readers and subscribers from all over the country are reporting similar conditions in their market.  Yes, I know some small pockets around the country may still be “hot,” but if you live in one of those areas email me with what you are seeing by June.

Here’s a preview of some of the content in Sunday’s Short Seller’s Journal (click to enlarge):

The graph above is from the NAHB’s website that shows its homebuilder “sentimement” index plotted against single-family housing starts. You’ll note the tight correlation except in times of irrational exuberance exhibited by builders. You’ll note that starts crash when exuberance is at a peak. Exuberance by builders hit a high in November not seen since 2005…here’s how it translated in the homebuilder stocks:

Note the crash in housing stocks a few months after homebuilder “sentiment” index peaked.  From a fundamental standpoint, the homebuilders are more overvalued now than they were in 2005 in terms of enterprise value to unit sales.  This because debt and inventory levels at just about every major homebuilder is as high or higher now than it was in 2005 BUT unit sales volume is roughly 50% of the volume at the 2005 peak.  The equities are set up of another spectacular sell-off.

Refi and purchase mortgage applications are getting crushed with mortgage rates up only 1% from the all-time lows.  What will happen when mortgage rates “normalize” – i.e. blow out another 3-5%?

The next issue of the Short Seller’s Journal will include a lot more detail on the housing market and some surprisingly bearish numbers on retail sales this holiday season to date. You can find out more about the SSJ by clicking on this link: Short Seller’s Journal subscription link.