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Existing home sales for December were reported Thursday by the National Association of Realtors. The headline number showed a 1% gain over November, after November's original reported home sales were revised lower by 5.9%. Based on recent reporting patterns, I expect that December's number will be revised lower when the report for January is released next month. Year over year December showed a 0.6% decline. While the headline number reported a slight nominal month to month gain, a look "under the hood" reveals a troubling pattern for home sales. Based on the trend I see developing in the housing market data, I expect that 2014 will take housing stock bulls by surprise with a sharp decline in sales and reported profits.

For my analysis, any data referenced is taken from this table of existing home sales from the NAR report linked above. In analyzing the underlying statistical trends, the seasonally adjusted annualized rate - or SAAR - for both November and December were the weakest in over a year. The year over year decline for December was the first yr/yr decline since June 2011. Worse, looking at the fourth quarter in its entirety, the annualized pace of sales for Q4 declined 27.9% vs. Q4 last year. Also, Q4's quarterly rate declined 7.8% sequentially from Q3 this year. While some may read seasonality into the numbers, please note that "seasonal adjustments" - as I have documented in previous articles - are designed to "cleanse" seasonal variations from the data series so that every month can be compared "apples to apples."

In addition to the declining trend in existing home sales, especially when looked at sequentially over the last six months of 2013 (see my previous articles), the percentage of first time buyers who purchased homes in December declined to 27% from 30% in December 2012. For me at least, this one of the biggest red flags for the housing market because first time buyers represent the primary fundamental cohort of home buyers. For instance, investors who look to renovate and flip, especially at the lower end, are dependent on selling to a healthy base of first time buyers. In addition, homeowners looking to move up to a bigger home need to be able to sell their existing home, which requires steady demand from first-timers.

Another bearish indicator for home sales is the trend in price. While the median and average sales price for December was higher than November and October, December's average price was 6% below June's peak price. The median December price was 7.5% below June's median price. In fact, if you look at the price data from the link above, you'll see that the average/median price has declined steadily almost every month since June. In my view, a declining price indicates that the demand side of the market is growing weaker and sellers have to lower their prices in order to move homes. I expect this trend to continue, and possibly accelerate, in the coming year.

Going forward into 2014, my economic outlook is probably a lot more negative than that of the typical Wall Street analyst. Because of this, and because of the negative trend in home sales that has already developed in the latter half of 2013, I expect that sales data released over the next year will negatively surprise housing market investors, both home flippers and those long the stocks. As such, I continue to recommend that investors should sell their housing stocks on all rallies in the sector. Also, I expect that aggressive market players will do very well over the next 1-2 years by building up short positions in the home builder stocks.

Two easy ways to play a bearish view in housing is to either go long the ProShares UltraShort Real Estate ETF (SRS), which is 2x the inverse of the return on the Dow Jones Real Estate Index, or short the SPDR S&P Homebuilder ETF (XHB). My personal preference is to short individual homebuilders. I prefer this because some homebuilders will fare worse than others and you can achieve bigger gains if you can pick the companies which run into the most trouble if the market declines. My two current short plays are D.R. Horton (DHI) and KB Home (KBH). Despite the Q4 run up in housing stocks, I am still up over 18% in my DHI short position. I am slightly down on KBH, but I didn't put that on until late September and I plan on adding to my position possibly this week. I have reviewed DHI and KBH in some past articles and will update my analysis after their next quarterly reports are released.

Source: December Existing Home Sales: The Housing Bear Market Is Back