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 50 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 US debt ceiling debates, something that has
already occurred 80 times over the past 50 years? It's doubtful.
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
"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
) 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 2012
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 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
(INDEXSP:.INX) sector this year, along with Utilities. Construction
Stocks and Indices 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 US recovery.
This is something that we were warning about on May 29 in our
Genuine Housing Recovery or Relief Rally?
when lumber prices were leading the housing market lower.
iShares Dow Jones US Home Construction
(NYSEARCA:ITB) was trading at $25 we noticed. Since then housing
stocks have fallen over 5%. Meanwhile the broader markets are up
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 a
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.
Editor's note: This story by
originally appeared on
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