Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
Independent Scotland Currency, Plan A, B, C or D - British or Scottish Pound? - 2nd Sep 14
Gold and Silver Price A Critical Juncture - 2nd Sep 14
Gold and Silver Precious Metals Complex Contradiction and Potential - 2nd Sep 14
France And The Long-Gone Thatcher Moment - 2nd Sep 14
Stock Market Approaching An Important High? - 2nd Sep 14
Gold, Silver Price Summer Doldrums Coming to an End - 2nd Sep 14
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

U.S. Housing Market Short Squeeze Shorting Opportunity

Housing-Market / US Housing Sep 06, 2013 - 03:44 PM GMT

By: Money_Morning

Housing-Market

Shah Gilani writes:Everyone knows the U.S. housing "recovery" has been resurrected on slippery ground. But now that we're finally about to slip - big time - no one sees it coming...

Then again, how could they?

The numbers are incredibly misleading...


According to the Commerce Department, new residential home sales in July fell a whopping 13.4% from their June sales pace. And sales in April, May, and June were all revised significantly lower.

Yet according to the National Association of Realtors, existing home sales (completed transactions that include single-family homes, townhomes, condominiums, and co-ops) increased 6.5%... to a seasonally adjusted annual rate of 5.39 million in July, from a downwardly revised 5.06 million in June.

On the surface, the divergence is confusing. But not when you look below the surface, where the real money gets made.

As you'll see (before anyone else), the housing "recovery" is just one giant "short squeeze."

And you can make a flat-out killing the moment it ends...

Meet America's Biggest Home Buyers

The divergence in sales of new homes vs. existing homes can be explained as a function of three factors: investor interest, pricing, and potential appreciation.

In just the last two years, institutional investors, hedge funds, private equity firms, and real estate investment trusts have raised more than $18 billion and bought more than 100,000 single-family homes.

Blackstone Group L.P.'s Invitation Homes unit has spent over $5 billion buying more than 32,000 single-family homes. They are the largest owner of homes in the United States.

American Homes 4 Rent, which went public last month and is the second-largest single-family homeowner in the United States, has spent $3.4 billion buying up almost 20,000 single-family homes and said in their August earnings call that they're spending $100 million a month buying more homes.

These institutional buyers aren't buying new homes in bulk; they're buying existing homes in bulk... and one at a time.

New homes, built by giant national builders like Pulte, Lennar, and Toll Brothers, as well as new homes built by small regional and local builders, are priced according to their cost to build, with hoped-for profit margins added on. Generally, there isn't a lot of negotiating room on prices.

Additionally, new homes are financed by builders' banks who build cushions into their loans. And since loans are "new," they can remain outstanding a lot longer than old loans before banks have to classify them as "non-performing."

That gives builders of new homes greater pricing and staying power. In other words, builders aren't readily discounting their inventories to make them attractive to new home buyers.

On the existing homes' side of the street, there's a lot more room to negotiate...

A Crowd of Highly Motivated Sellers... Who Love Cash

Distressed property owners - banks holding foreclosures, beleaguered individual owners, and short-selling owners (those selling homes for less than their mortgaged loan values) - have all been eager to sell... especially for cash, which institutional buyers readily dangle in front of them.

While institutional investors often pay cash, they are in fact financing the cash they're laying out. With interest rates as low as they are, especially for corporate borrowers able to float their I.O.U.s in the bond market, amassing cash hoards against their stock-based equity collateral (via covenant-lite bond offerings) adds to their massive buying power.

New homes tend to appreciate based on "at-the-market" trends, while existing homes are often perceived as having inherently more room to appreciate. That's because many existing homes were previously valued significantly above current market prices. Homes in neighborhoods that once enjoyed solid appreciation rates but have been deeply discounted are desirable purchases on account of the "bounce-back in price" perception.

That's why existing home sales have held up better than new home sales.

Now let's look at house price appreciation trends, which have been robust to say the least.

Just keep in mind the impact the billions of dollars being applied to the market by institutions is having on pricing trends in the existing home market...

A Dangerous Double Dip Looms

The national median existing home price for all housing types was $213,500 in July, which is 13.7% above July 2012 and marks 17 consecutive months of year-over-year price increases, which last occurred from January 2005 to May 2006.

The median price rose at double-digit rates for the past eight months and is only 7.3% below the all-time record of $230,400, posted in July 2006. Two years ago, the median price was 25.7% below the peak.

New home prices haven't risen as quickly. In 2009, after falling 6.6% from faltering 2008 prices, the median new home price was $216,700. As of July 2013 the median new home price is $257,200, which is an 18% increase over the 2009 price level.

In spite of the recent divergence in the pace of sales and rates of change in sales trends between existing and new homes sales, prices on both streets have risen steadily.

Given the rapid appreciation rates of both new and existing home prices and the outsized impact institutional buying has had on existing home sales price appreciation, unless inventories of new and existing homes drop precipitously, it's not only unlikely that the recovery in housing will continue, but it's likely to peter out and result in a double-dip backward slide.

Why? Housing has risen too far too fast off its floor given trends in economic growth, employment, interest rates, lending standards, mortgage money availability, and consumer confidence.

We're already seeing a back-up in pending sale contracts, refinancings, and new money purchase loans on account of the tick up in rates. Which, on a historic basis, are still very low. If rates continue to climb on the long end of the yield curve, buyers will balk. If rates tick up on the short end of the yield curve, banks will balk at lending. In other words, if the Fed does not continue to engineer a steep yield curve, then purchase money will become tighter and tighter.

There can't be any meaningful recovery in housing beyond the bounce we've seen unless lenders loosen underwriting standards and make loans plentiful.

The back-office mechanics that previously facilitated the robust velocity of mortgage money availability, meaning the ability of lenders to package, securitize, and offload loans from their balance sheets, are still clogged up.

Risk-retention rules pertaining to how much lenders have to retain on their balance sheets against loans they make, in the form of the as-yet unfinished qualified residential mortgage (QRM or QM) rules, will be an impediment to robust lending.

U.S. regulations and Basel rules are still being written, rewritten, and challenged by banks who argue that more stringent reserve ratios, leverage ratios, and risk-asset definitions will be too restrictive and will result in credit tightening. So far, the net result is that banks aren't inclined to flush mortgage conduits with money if they don't know how those loans will be accounted for by regulators.

The bottom line, again:

You can't sustain a robust housing recovery without banks' willing participation.

Then there's the economy, unemployment, and home purchaser confidence.

None of those metrics are encouraging.

While second-quarter GDP growth was revised to 2.5% from 1.7%, the pace of growth remains well below the expected 3% rate economists had projected for 2013.

Unemployment is still stubbornly high and may remain above 7% as the new structural level of unemployment becomes harder and harder to bring down.

Technology and productivity gains have eviscerated middle-management jobs, and Obamacare threatens to reduce the ranks of the fully employed in the future as companies opt for more part-time workers to reduce their mandated contributions under the new healthcare regime rules.

This Is a Classic Short Squeeze

Last, but certainly not least, future homebuyers are witnessing the evaporation of their own potential equity build-up as rapidly rising prices are squeezing any cushion new buyers would have hoped to enjoy. As that appreciation gets ratcheted out of the market for new buyers, banks will increasingly demand more skin in the game on account of expected or hoped-for equity cushion build-up rapidly disappearing.

The rapid rise in home prics looks to me like a classic short squeeze.

Investors have bid up home prices off the floor so as to make rentals more expensive and force individual homebuyers to pay full price for whatever inventory is on the market.

Once the trade is fully priced and at new highs, on a relative time and appreciation basis, the buying power represented by the bottom-feeding institutional money will dry up, and only homebuyers in a solidly growing economy with greater employment opportunities and bankable confidence will be left to take prices higher and provide forward momentum for the recovery in housing.

As a trader, I say: "Good luck with that."

I'll be watching the trend rollover and will look to short the housing recovery in the not too distant future.

I'll let you know...

Source :http://moneymorning.com/2013/09/06/the-all-american-short-squeeze-no-one-else-sees/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014