Housing Market Collapse: Gradually, Then Suddenly

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Includes: BBRE, CLAW, DRA, DRN, DRV, FREL, FRI, FTY, HOML, IARAX, ICF, ITB, IYR, JRS, KBWY, LRET, MORL, MORT, NAIL, NRO, PKB, PPTY, PSR, REK, REM, RFI, RIF, RIT, RNP, RORE, RQI, RWR, SCHH, SRS, URE, USRT, VNQ, WREI, XHB, XLRE
by: Dave Kranzler

"How did you go bankrupt?" Bill asked.

"Two ways," Mike said. "Gradually, and then suddenly."

- "A Farewell To Arms," Hemingway

Zillow Group (NASDAQ:Z) stock plunged 24% this morning after reporting Q3 numbers that missed revenue and net income estimates. In addition, the company revised Q4 lower. Zillow is down 52% after hitting an all-time high of $65 in mid-June.

Zillow Group is sort of a "derivative" of the housing market. It "derives" its revenues from all activities related to home sales - realtor commissions, advertising, mortgage fees, internet search traffic, flipping, investing, rentals. As such, the plight of Zillow foreshadows the plight of the entire housing market.

The Dow Jones Home Construction index is down 35% since January 22nd. The housing stocks have been in a bear market - at least as defined by the financial media - for several months. It's amusing to note that the financial media conveniently ignores this fact. It's as if there's a hidden regulation that forbids financial reporters from reporting anything negative about the economy and markets.

But the data I analyze and present to my Short Seller's Journal subscribers shows that the housing market has been contracting for several months. And it's not about the moronic "low inventory" narrative promoted by the snake oil salesman at the National Association of Realtors and aggressively propagated by the media. Inventory, especially for lower-priced new construction homes, has been rising quickly this year.

More negative data was released just on Wednesday morning, as the Mortgage Bankers Association reported that its purchase mortgage index dropped 5% from a week ago. This data is "seasonally adjusted," for those of you looking to apply the seasonality spin.

Purchase mortgage applications are a leading indicator of future home sale closings. The data has been trending highly negative since April this year.

I presented Zillow as a short idea in my Short Seller's Journal earlier this year when the stock was in the $50s. While Wall Street analysts were selling housing market bull spin, I was digging into Zillow's numbers and concluded that the stock was eventually going to experience a "come to Jesus" moment. In last week's issue, I presented another housing market "derivative" stock that has at least $100 of downside (and likely more).

Similarly, while most homebuilder stocks are down over 30% from their January highs, there's a bigger bloodbath coming in the near future. Data I receive from subscribers around the country show that home sales in some of the previously hottest bubble markets were down 20-30% in October.

I expect that the housing market "re-adjustment" will be more severe this time in comparison to the "Big Short" mid-2000s market collapse. Because the housing market and all the economic activity connected to home sale activity is about 25% of GDP, a housing market collapse will translate into general economic collapse that will be worse than the recession associated with "Great Financial Crisis."