The Housing Market Is Starting To Get Hammered

by: Dave Kranzler


Existing home sales for the first two months of 2014 were down nearly 25% on an annualized basis.

The new home sales decline is getting steeper.

Pending home sales appear to be collapsing.

As per John Williams on

Based on this morning's (March 20th) reporting, existing-home sales were declining at an annualized quarterly pace of 24.4%, based on two months of reporting for first-quarter 2014. That follows an annualized quarterly pace of decline of 25.6% in fourth-quarter 2013.

The Dow Jones Home Construction Index (DJUSHB) is down 12.3% since closing Feb. 27 at 536. In that same time period, the S&P 500 was basically flat. A negative divergence from the broad market of this degree is typically a strong warning sign that something is wrong with the underlying fundamentals for the divergent market sector. With that in mind, the housing data released in the last week suggests that the housing market may entering a severe decline.

Starting with last week's existing home sales report, which I analyzed here, existing home sales for the first two months of 2014 are declining at a quarterly rate of 24.4%. This calculation is based on taking the year over year rate of decline for the first two months of 2014 compared to the first two months of 2013 and annualizing the rate of change. While the validity of this metric is open to debate, the methodology is the same statistical methodology used by the National Association of Realtors (NAR) in calculating their Seasonally Adjusted Annualized Rate of home sales for any given month. Whether you use SAAR comps or not, there's no question that the existing home sales data have been declining at fairly rapid rate on a monthly sequential basis since July's peak (unadjusted numbers from my article link above).

Similarly, February's new home sales report showed a 3.3% rate of decline vs. January. However, January's original report was revised lower from 468k SAAR, to 455k. In addition, the average price of a new home fell to $261k, which down 6.5% from its high in April 2013. Part of the bullish "narrative" for the housing market has been that strong demand is pushing up prices. However, the actual data tells me that demand is declining. And in further affirmation of declining demand, new home inventories jumped 24.7% in February vs. February 2013. In addition, an even better supply/demand metric is "months supply," which jumped up nearly 27% year over year for February.

Clearly, both the existing home sales data and the new home sales data are showing a trend in which homes sales appear to be declining at an increasing rate. The release of today's Pending Home Sales index by NAR further reinforces this likelihood. NAR describes this index as "a leading indicator for the housing sector." The index for February showed a .8% decline vs. January but a 10.5% drop vs. February 2013. The index, which is seasonally adjusted and annualized, thereby removing seasonal factors, is now down nearly 15% from its peak in June 2013. Furthermore, January's number was originally reported to be a .1% gain over December but it was revised lower to a -.2%. Because of this downward revision, this index has now fallen for nine straight months.

Based on the three housing market reports released in the last week, my analysis thus shows that the housing market could be at the start of a serious decline in both sales volume and price. If you review my article on existing home sales, you'll see that the big institutional investor, which was primarily responsible for driving sales volume and price gains over the last two years, is pulling away from the market as a buyer. In addition, the first-time buyer cohort, which historically has represented 40% of housing market purchases, is shrinking under the weight of debt (student loans and credit cards) and the inability to find the type of jobs that pay enough to support the purchase of a home.

In my view, this is likely why the DJUSHB housing stock index has dropped over 12% in the last three weeks despite very little change in the price level of the broad market indices. This is also likely why the index is down nearly 15% since its peak in May 2013 despite an increase of 15% in the S&P 500 over the same time period.

I continue to recommend selling or short-selling homebuilder equities. I am short D.R. Horton (NYSE:DHI), KB Home (NYSE:KBH) and Ryland (NYSE:RYL). I also believe Beazer (NYSE:BZH), Toll (NYSE:TOL), Lennar (NYSE:LEN) and Pulte (NYSE:PHM) are excellent short-sale candidates. Be prepared to add to your position if you short stocks in this sector. As an example, I shorted KBH a little above $18 in September and watched it run up over $20 in February. I added some there and am now up over 10% on my entire position, outperforming the S&P 500 over the same time period. In my opinion, the biggest gains from shorting this sector are still ahead of us.

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.