The Housing Market May Be Starting To Crash

Includes: ITB, PKB, XHB
by: Dave Kranzler

Recent economic reports suggest a bleaker picture for housing. Existing home sales fell 5.1% in January from December to the slowest pace in over a year. Permits for new residential construction and housing starts were both down and below expectations. - Case-Shiller Housing Marke Report

It has been my view for several months that the housing market was not only losing the momentum of its Fed/Government stimulus-fueled bounce but that the market would fall in 2014 unless the amount of stimulus was increased. As I have detailed in previous articles, the key to analyzing the current trend in the market is to look at month to month data comps rather than the year over year price/sales gains shown in headline news reports. The month to month trend for price and sales volume clearly shows a significant downtrend forming. However, a couple of new reports now lead me to believe that the housing market may be in the early stages of another crash.

Redfin, the online real estate data tracking and brokerage company, released its monthly price/volume report for the 19 largest metro areas for January last week and it showed a surprise 9.9% drop in sales volume: Homes Sold By Metro for January. Note that this drop was for January 2014 vs. January 2013. This shows an even bigger drop than the 5% decline reported by the National Association of Realtors, which I recently analyzed. Because the Redfin report is using actual data, as opposed to the seasonally adjusted annualized data sample used by the NAR, in my view it offers a more realistic and compelling representation of the degree to which the housing market is declining.

Furthermore, the Redfin report illustrates the fact that the "bad weather" excuse for negative housing data that currently permeates analyst-based news reports is not valid. If you look at the home sales volume data in the link above, you'll see that nearly the entire west coast experienced close to a 20% drop in sales volume year over year for January, as did Phoenix and Las Vegas. As I have detailed in previous articles, the weather for January on the west coast was warmer than average. Interestingly, in the northeast - where the weather was unusually harsh for January - Boston and Long Island showed small positive year over year comps for January. Philadelphia and Baltimore showed a much smaller decline than the national average decline. Thus, given these specific regional sales results, it is further apparent that the weather was likely not a probable factor in January's weak housing market data.

In addition to the Redfin January metro home sales report, a report suggests that investor activity in 2014 is expected to drop off. As has been widely acknowledged, the increase in housing market transaction volume and pricing over the last two years has been primarily driven by demand from institutional investor buying. Because of this, the absence of demand from this segment of the market could trigger a big decline in the market.

The Zillow report also suggests that this institutional fund selling will help stimulate sales by increasing inventory. I first suggested last July that eventual institutional investor selling would create a big imbalance between supply and demand which would drive market prices and volume significantly lower. Based on that report it would appear that some real estate professionals believe that this selling will start occur during 2014. In my view, because the traditional homebuyer segment of the market has either already taken advantage of low rates to buy a home or simply can not afford to buy one at all, selling from big investors will not only not be absorbed by the market but it will have an unexpectedly large negative effect on the housing market.

Furthermore, I would argue that the declining trend in sales volume, which seems to be accelerating, reflects the fact that the traditional homebuyer segment of the market is fading along with institutional fund demand. To the extent that smaller "flippers" are sitting on homes currently being renovated or are waiting for spring to flip their home, if I'm right about the demand side of the market, selling by flippers will exert even more downward pressure on the entire market in the coming months.

The homebuilders seem to be grinding higher despite what I see as rapidly deteriorating fundamentals that will soon translate into poor financial results. Although the Dow Jones Home Construction Index (DJUSHB) is now back to the level where it was when I first recommended shorting the homebuilders a year ago, the S&P 500 is up 23% in the same time period. This to me is an ominous divergence of the homebuilder stocks from the rest of the stock market that is signaling the declining fundamentals of the housing market. I will elaborate on several red flags I see in current homebuilder earnings reports in an upcoming article. For now I continue to recommend selling and/or short-selling the homebuilder stocks. Please see my recent articles for my best short-sell ideas.

Disclosure: I am short DHI, KBH, RYL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.