A Bearish Signal From Housing Stocks
David I. Kranzler | Dec 14, 2016 01:18AM ET
The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th. 30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.
Interestingly, the Dow Jones Home Construction has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:
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The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index. I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.
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Here’s another interesting graphic sourced from the Mortgage Bankers Association:
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The data is through December 2nd, as mortgage application data lags by a week. As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.
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A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows. This is not unexpected. Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing. Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.
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As it turns out, mortgage delinquency rates are quickly rising:
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Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume.
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Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared 64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.
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Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.
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Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor” that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials. Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept. On the other hand, here’s actual data that applies heavily to the millennial demographic:
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The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%.
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The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt. In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage. This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).
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Speaking of which, Blackstone (NYSE:BX), the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago. If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file. I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.
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The housing market data tends to be lagged and extremely massaged by the most widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports). The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable. But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index. I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.
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