After underperforming during winter 2014, March's housing market
data was expected to rebound. That did not happen, and
housing remains crucially poised at the edge of a cliff, with
higher home prices it seems the only protection.
March's new home sales data showed a 13.3% decline year over
year. Existing home sales fared even worse, falling for the
third straight month and seven out of the last 8 months.
So much for the weather rebound!
The existing home sales number of 4.59 million was the lowest
since July 2012. The first chart below shows that the
supposed housing rebound is certainly not in the numbers of
But although fewer homes are being sold, prices remain
elevated. What is going on?
Analysis provided to our subscribers in November showed that the
number of traditional homebuyers, those using mortgages, was
crumbling. Since November those numbers have only gotten
worse as mortgage applications in 2014 are already down 19% from a
year ago as refinances also dry up (now down 73% since last
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The number of mortgage applications today are synonymous with
the numbers from the late 1990s, a remarkable statistic given the
numbers aren't adjusted per capita (for growth in the
Implied by the drop in mortgages the first time homebuyer is
also disappearing from the mortgage market as they can't afford the
higher home prices.
Once 37% of the market in 2012, the first time homebuyer now is
only 30% of the home market.
Instead, the bulk of home sales are being done through all cash,
a sure sign of a pickup in home speculation and investment.
Over 50% of all home sales continue to be done through all cash
transactions, far greater than any historical periods.
Affordability Weakens, so Banks Reach
Banks are again lending mortgages to under qualified applicants
in an effort to make up for the lack of traditional homebuyers and
keep their mortgage businesses afloat.
Recently, JP Morgan (
) announced 2,000 more layoffs in addition to 2013's 4,000 mortgage
department layoffs. They weren't the only ones as Wells Fargo
), AIG (
), and Bank of America (
) also joined in laying off large parts of their mortgage
But that hasn't stopped the banks and lenders from still
reaching for borrowers.
According to the AEI's International Center on Housing Risk, 24%
of all mortgage loans are now being offered to candidates with debt
to income levels higher than the CFPB's qualified mortgage rule
limit of 43%.
As the Wall Street Journal reports, "New lenders spring up to
cater to subprime sector".
Adding to the risk, over 50% of all home purchase loans now
utilize only a 5% down payment, putting banks and lenders again at
great risk of a housing market price decline.
The only thing it seems going well for the housing market is the
home price inflation driven by investors and the non-traditional
But how long will what seems to be a temporary rise in prices
driven by investors last?
If there is one thing investors and financial theory rely on, it
is that the equity markets are forward looking.
Housing stocks (Nasdaq:FSHOX) have performed true to form,
anticipating the slowdown in the sector, topping back in May of
2013 while most other sectors and stocks continued to rise to new
highs in 2013 and 2014.
(For more on the housing bubble's eventual bursting, see my
other article from February, "
have housing stocks topped
The chart below of the Contruction Shares ETF (NYSEARCA:ITB) was
provided to our Technical Forecast readers along with commentary
showing both a short term long opportunity but also a longer term
short trade once prices reach key thresholds and break down through
final support levels.
The bearish setup shows that in addition to double topping with
May's high in February, ITB may be forming a bearish head and
shoulders pattern as it is close to breaking down from its
If it does, just like last May, it will likely be another sign
that the housing market is going to continue to get worse as the
home builder equity prices (NYSEARCA:XHB) continue to lead the
declining housing market fundamentals.
Check out the
Profit Strategy Newsletter
to see our recent study on the housing market's speculative
fervor and what it means for the sector ETFs tied to it.
The housing recovery is essentially non-existent except in
price, and eventually these disconnects will work themselves out,
likely with housing prices joining the other fundamentals at lower
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