The Housing Market: Fact vs. Fiction

The homebuilders have had near-parabolic run-up in their stock prices. This is not atypical of the sector, which is twice as volatile as the overall stock market because of the extreme amount of debt embedded in homebuilder balance sheets and the relatively high short-interest in the shares. Incredibly, the homebuilder stocks can’t even get back to within 50% of their peak prices in 2005 at a time when the S&P 500 sets a new record every day. That fact alone in and of itself reflects to relatively poor fundamentals underlying the housing market.
Of course, the homebuilders continue to pile on debt and inventory just as the slightly reflated housing bubble is popping. I’ve updated the Q3 results for one of the homebuilder reports I published in October. The Company continued to burn cash despite having its best sales quarter since the big housing bubble popped. It also piled on more inventory and its cancellation rate spiked up to 20% in Q3 from 17% in Q2. Perhaps most telling is that as soon as the restricted period for insider stock transactions was lifted after the release of its earnings, 13 insiders unloaded close 150,000 shares. There were no buyers. You can access this updated and comprehensive report here – it’s the first report listed: Homebuilder Stock Reports. This company has 3.5x more debt than it had at the peak of the housing bubble. This is an even better short-sale candidate now than it was at the beginning of October. And now the Fed is no longer buying billions in mortgages every week.
Yesterday I saw an article in which the National Association of Realtors (existing home sales pimps) stated that rent increases in 2015 will outpace inflation. Funny because the NAR’s chief pimp economist clearly has not surveyed the rank and file. I know for a fact in Denver that the available inventory of both homes and apartments is rapidly escalating and rents are softening up. I expect this trend to accelerate over the next several months as several huge rental buildings come on-stream here. I have heard similar accounts from several readers all over the country.

This post was published at Investment Research Dynamics on November 25, 2014.