No Virginia: The Falling Housing Market Isn't About Tight Inventory

|
Includes: CLAW, HOML, ITB, NAIL, PKB, XHB
by: Dave Kranzler

The National Association of Realtors released its monthly "Pending" home sale report for April Thursday morning. It fell 1.3% from March. The Wall Street analytic "brain trust" was looking for a 0.4% gain. The housing data is repetitively coming in well below Wall Street forecasts. This is emblematic of the unrealistic amount of "hope" built into the psychology of the American investor, who wants badly to believe anything he is told by "experts." A cynic might say it's adverse denial of reality…

The NAR's chief pimp, Larry Yun, once again is blaming the bad numbers on shortages of homes across the country. This narrative is the pinnacle of mendacity. To be sure, in certain "hot" areas, there is a shortage of sub-$500k homes. Blame the Government, which has made available Taxpayer-backed mortgages to anyone who can fog a mirror - see this article, for instance. And blame the flippers, who are snapping up low-priced homes on the hope that they can turn it around and sell it to one of the fog-the-mirror buyers using a Government subsidized mortgage.

In truth, a recent survey showed that more than 50% of the inventory nationwide is in the high-priced (over $750k) price segment. And prices are falling in most markets in this category, led by New York City (all five boroughs), which is starting to get decimated.

XHB is an ETF that tracks the S&P Homebuilders Select Industry Index. Lowes (NYSE:LOW) and Home Depot (NYSE:HD) are the largest holdings. Pulte (NYSE:PHM), NVR, Inc. (NYSE:NVR) and D.R.Horton (NYSE:DHI) are the next three largest holdings. Like the DJUSBH, it's a mix of homebuilders and housing market-related stocks (building construction suppliers, etc).

Recently there's been some extraordinarily large put positions purchased on XHB (XHB closed at $39.11 on Friday). For instance, on Monday and Tuesday last week, someone bought 2,200 and 2,500 June 15th $40-strike puts. There's 4,551 June 15th $38-strike put open interest as well. These numbers substantially outnumber the open call options for the June 15th expiry. There's 15,033 of open interest in the September $35s, with 4,400 of those purchased this past Thursday. The largest September call open interest is 1,393 $42s.

The point here is that some entities - probably a few hedge funds - are making a rather large bearish bet on the housing sector. It's hard to know if the puts are being used to speculate or as a hedge. Either way, the sheer volume of puts purchased reflects heavy bearish sentiment toward the sector.

Peak flipping? I also strongly suspect that the NAR skews its data-sample toward the lower-price market segment. In other words, if it included a higher percentage of over $750k homes in its data-collection and sales calculation, the existing home sales number for April would have been lower. It's the magic of statistics. I would also suggest that there was probably some sales "pulled forward" out of fear of rising interest rates. Typically there's a surge in homebuying when interest rates begin to rise. Certainly, the mortgage brokers are pitching the "buy now before rates go higher" story.

On a seasonal basis, home sales should be rising from March to April, even on a seasonally adjusted annualized rate basis. Furthermore, the prospect for May - assuming the NAR does not pull any statistical chicanery - is not good. How do I know? Because mortgage purchase applications have been down 5 weeks in a row. Four of the past five weeks, purchase apps were down 2% each week and one week was down 0.2%. This is why the XHB is down 15.6% since peaking in late January. Some of the homebuilders I've been recommending as shorts are down north of 20%. They still have a long way to drop.