Reports that there’s a shortage of new homes are seeded either in fraud or complete ignorance, notes Kranzler. Shorting TREE is something I will be considering. – Eric Dubin.
TND Guest Contributor: Dave Kranzler
I’ve worked through four bubbles – they all end the same…I think the flippers in Denver metro are driving the under $400,000 price to a frenzy and the over $500,000 in the burbs are dropping in price. Some of these flippers have 8-10 houses at the same time. A little jiggle and they will dump. Then the part time rental landlords follow in selling as the rental market gets tough. A trashed house or eviction usually puts these houses on the market… – Three decade-plus Denver real estate professional and subscriber to the Short Seller Journal
The homebuilders are getting hammered today – down 2.6% with the SPX up over 4 pts – on the news that housing starts for August dropped sharply, down 5.4% from July. Of course the report missed Wall Street’s “hockey stick growth” consensus estimate.
Funny thing about housing starts, it’s kind of a useless statistic. The data is collected and prepared by the Census Bureau, which is notoriously inept. The numbers presented are “seasonally adjusted” and converted into an annualized rate. Notwithstanding all other problems with the data sample and annualization calculation, presenting an annualized rate number for monthly report is idiotic.
But having said that, a housing start is counted when a shovel is inserted into a piece of land that has been permitted for building a home. When the market goes bad, many of those “starts” never become much more than a small pile of dirt.
All of that aside, the housing market in most areas of the country is anywhere from “soft” to “crashing.” Some of the high-end resort areas like Aspen and the Hamptons are experiencing 50% declines in year over year sales volume and prices are dropping like a rock.
The “inventory shortage” is a myth of epic proportions. Inventory problems arise when flippers begin to outbid bona fide home owners and then flip the home into another bona fide buyer (or another flipper) who was qualified to take out an even bigger mortgage than the original bona fide buyer. It’s the tulip bulb dynamic but fueled by debt. As soon as prices start slipping, the flippers fold and there’s plenty of “for sale” signs everywhere.
I was on a radio show last week and the host happened to mention that he couldn’t believe the number of “for sale” signs he was seeing when he drives to work. My response was that I’m glad I’m not the only person in Denver who has noticed that. Interestingly, I was driving through a neighborhood yesterday that I began scoping out in January and noticed three “for sale” signs, one with a “price reduced” sign – not “new price” but “price reduced.” This is an area that did not have any existing home inventory from January to June – literally none (though it has an oversupply of unsold new homes).
As for the reports that there’s a shortage of new homes, those are seeded either in fraud or complete ignorance. I look at the financials of every major public homebuilder every quarter and every quarter almost every single builder shows a new record in the value of its inventory. Some of that is attributable to price, but most of it is unit volume.
But don’t take it from me or the National Association of Realtors or the Census Bureau or the National Association of Homebuilders, the best housing market “canary” is Lending Tree stock (TREE). Lending Tree is a “derivative” of the housing market. TREE’s revenues are derived from fees paid to TREE by lenders who receive loan requests from borrowers, either via online clicks or call transfers.
Fees from mortgage products represent about 60% of revenues. Fees from auto, home equity, personal and student loans are about 40%. Auto loans would be the majority of its non-mortgage business. TREE’s revenues are 100% reliant on the number of borrowers who are looking to buy a home or car.
TREE reported Q2 results on July 28. Revenues from Q1 to Q2 were flat BUT mortgage product fees declined from Q1 to Q2 (auto and personal loans made up the balance). The drop in TREE’s revenues from mortgages in Q2 reflects the fact that less people were looking for mortgages, which means there’s less people looking to buy a home. It’s as simple as that.
I presented TREE as a short in the Short Seller’s Journal on Sept 11 when the stock was at $101.50. It’s trading as I write this at $89.90, down 11.4% in 6 1/2 trading days. The SPX is actually up 17 points in the same time period. There’s a message there about TREE and about the housing market.
In fact, the last 6 new ideas that I’ve presented in the Short Seller’s Journal have worked almost right out of the gate. I have not had this kind of streak since the stock market started tanking at the beginning of 2016. My ideas have worked despite the blatant intervention by the Fed to keep the S&P 500 and Dow propped up. This is because most of the “sub-sectors” of the market are melting down.
Another example is RL (Ralph Lauren), which I presented on August 14 at $108. It’s trading right now at $98, down 9.3%. I explain in my report why this stock will get cut in half from $108 within 12 months. The Short Seller’s Journal is published weekly and the ideas I present are based on the deteriorating economic, financial and business fundamentals of the stocks I present. You can subscribe by clicking here: SSJ Subscription. Note, it’s a monthly recurring payment subscription and you can cancel at any time.
By the way, TREE was a $5 stock at the beginning for 2012. The company’s business model is nothing more than a pure creation of the massive debt bubble that was created by the Fed’s money printing and credit creation policies. It will be back $5 in less time than it took for it to run up to its $135 all-time high in August 2015.
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About Dave Kranzler:
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.