The Housing Market: A Bigger Bubble Than 2008 Is Popping

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by: Dave Kranzler

The XHB homebuilder ETF is decisively below three key moving averages after it knifed below its 50-dma last week. KB Home (NYSE:KBH) reported a big earnings and revenue "beat" on Thursday after the market closed. The stock soared as much as 9% on Friday. Per the advice I gave my subscribers about shorting the inevitable price spike in the stock, I shorted the stock Friday mid-day (July and August at-the-money puts). The stock is down 6% from its high Friday and is back below all of its key moving averages (21, 50, 200).

Several subscribers have emailed me today to report big gains on put options purchased Friday. When a stock sells off like this after "beating" Wall Street estimates and raising guidance, it's a very bearish signal. I've identified the best homebuilders to short, and I provide guidance on timing and the use of put options.

Housing is dropping, and it's demand-driven not supply-driven. All three housing market reports released two weeks ago showed industry deterioration. The homebuilder "sentiment" index for May, now known as the "housing market" index for some reason, showed its fourth decline since the index peaked in December. The index level of 68 in May was 10 points below Wall Street's expectation. The index is a "soft data" report measuring primarily homebuilder assessment of "foot traffic" (showings) and builder sentiment.

While the housing starts report for May showed an increase over April's report, the permits number plunged. Arguably, the housing starts report is among the least reliable of the housing reports because of the way in which a "start" is defined (put a shovel in the ground, that's a "start"). On the other hand, permits filed might reflect builder outlook. To further complicate the analysis, the report can be "lumpy" depending on the distribution between multi-family starts/permits and single-family home starts/permits.

A good friend of mine in North Carolina was looking at the Denver apartment rental market earlier this week and was shocked at the high level of vacancies. I would suggest this is similar in most larger cities. It also means that multi-family building construction will likely drop off precipitously over the next 12 months.

Existing home sales for May reported Wednesday showed the second straight month-to-month drop and the third straight month of year-over-year declines. The headline SAAR (Seasonally Adjusted Annualized Rate) number - 5.43 million - missed Wall Street's forecast for 5.5 million. April's number was revised lower. Once again, the NAR chief spin-meister blames the drop on low inventory. But this is outright nonsense. The month's supply for May increased from April, and at 4.1 months, is above the average month's supply for the trailing 12 months. It's also above the average months supply number for all of 2017. If low inventory is holding back pent-up demand, then May sales should have soared, especially given that May is historically one of the best months seasonally for home sales. The non-seasonally adjusted number for May was 3.4%, below that of May 2017.

The primary reason for declining home sales, as I've postulated in several past issues, is the shrinking pool of buyers who can afford to support the monthly cost of home ownership. The government lowered the bar for its taxpayer-backed mortgage programs every year since 2014. It lowered the down payment requirement, broadened the definition of what constitutes a down payment (as an example, seller concessions can be counted as part of a down payment), thereby reducing even further the amount of cash required from a buyer's bank account at closing, it cut mortgage insurance fees and it lowered income and credit score restrictions. After all this, the government is running out of people into whom it can stuff 0-3% down payment and 50% DTI mortgages in order to keep the housing market propped up.

A lot of short-term (buy and rent for 1-2 years and then flip) investors and flippers are holding homes that will come on the market as home prices fall. The majority of the MLS notices I receive for the zip codes in Denver I track are "price change" notices. All of them are price reductions. Whereas a year ago the price reductions were concentrated in the high-priced homes, now the price reductions are spread evenly across all price "buckets." Denver was one of the first hot markets to crack in the mid-2000s bubble, and I'm certain what I'm seeing in Denver is occurring across the country in most mid- to large metropolitan areas. Yes, I'm sure there's a few exceptions, but in general, high prices, rising mortgage rates and stagnant wages are like poison darts being thrown at the housing bubble.