The National Association of Homebuilders sentiment gauge has
been stuck in neutral for the past four months and the latest
number came in flat a 54 for October. A reading above 54
is said to be positive, and the spin is certainly positive, but
what is really going on with the housing market?
The flat verdict of 54 was below expectations of 55 and the
usual scapegoats are the reasons provided for the miss.
"Policy and economic uncertainty is undermining consumer
confidence. The fact that builder confidence remains above 50
is an encouraging sign, considering the unresolved debt and federal
budget issues cause builders and consumers to remain on the
So, consumers and builders are postponing their purchases and
building because of the U.S. debt ceiling debates, something that
has already occurred 80 times over the past 50 years?
This kind of rhetoric provides zero value and is simply meant to
give the media something to talk and write about.
In reality, the head of the Homebuilders Association either has no
real clue, or is afraid to say what he sees in fear of rocking the
market's fragile confidence boat. Either way, his musings
must be taken with a grain of salt.
"Just the Facts Ma'am"
The housing market is not healthy, no matter how the National
Association of Homebuilders, Realtors, Mortgage Brokers, or whoever
tries to sell you otherwise.
According to RealtyTrac, 49% of all home purchases in the month
of September were all cash deals, implying the traditional
homeowner has now become only half of the housing market (and
falling) as institutional investors such as Blackstone (
) set all time records in purchases. Compare the latest
number to only 30% of housing transactions that were all cash one
year ago and less than 20% for most of pre-2008.
Some other stats from RealtyTrac:
-Since 2011 over $1 Trillion of real estate has been sold in
the United States
-54% of those were all cash purchases since 2011
-In 2013, speculators and institutional investors have
already purchased 370,000 properties, more than both 2011 and
As is implied by the increase in institutional all cash
purchases, mortgage purchase applications have fallen off a cliff,
now down 20% from their May highs and showing no signs of
life. Mortgage purchase applications have fallen every month
since and are now at their lowest point in 2013 and most of
2012. Homes that are sold are continuing to be sold to less
and less traditional home owners.
Meanwhile interest rates (NYSEARCA:TLT) have started to move
against the consumer, making home affordability the worse it has
been since 2008.
Speculators are fueling this housing market, and that is never a
good long term sign. The stock market however is not fooled,
and is already seeing this as an issue.
The Leading Indicators
Housing stocks are significantly underperforming the broader
indices and have been the worst S&P sector this year, along
with Utilities. Construction Stocks and Indices
(NASDAQGIDS:^HGX) have performed even worse.
Given that speculators are now over 50% of the driving force
behind the housing market it is likely just a matter of time before
housing stocks really start to retreat as real demand continues to
dry up. Since housing makes up roughly 15% of the American
economy, homebuilder underperformance may also be warning of a
larger issue with the U.S. recovery.
This is something that we were warning about on 5/29 in our
Genuine Housing Recovery or Relief Rally
?" when lumber prices were leading the housing market lower.
When the iShares Dow Jones U.S. Home Construction (NYSEARCA:ITB)
was trading at $25 we noticed. Since then housing stocks have
fallen over 5%. Meanwhile the broader markets are up over 10%
Where is Housing Headed Next?
Check out the housing chart shown above.
Looking back since 1980, today's housing starts (shown in red)
have only recovered back to the levels of previous recession lows
at one million housing starts per month. This means that even
though today is seen as "recovering", in reality the recovery
remains only at levels associated with previous recession lows.
Based on the chart shown above, new housing starts are still in
Over the past few months, just as mortgage applications have
dried up, the chart shows that housing starts have also pulled back
to under 900k/month and down over 10% from their recent peak.
If this is the start of a renewed downtrend in the housing market,
then housing stocks could also get hammered.
Shown on the right side of the above chart, housing share prices
have outperformed their similar housing starts and a reversion to
the mean may be necessary as equities have likely gone too far too
fast. A pullback to values that coincide with current new
housing start levels means the Housing Index would need to fall 30%
to get back to equilibrium.
I'm watching the SPDR S&P Homebuilders ETF (NYSEARCA:XHB)
for a breakdown in its price as it is setting up a significant
technical chart pattern. A breakdown of this pattern suggests
a 20% downside move as the housing market continues to deteriorate
on declining fundamentals.
Profit Strategy Newsletter
uses fundamental, technical, and sentiment data to keep investors
on the right side of the market. The housing sector is
already showing significant weakness as the fundamentals now start
to join the deterioration the charts are warning about.
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