Is The Housing Market About To Drop Again?

 | Nov 17, 2013 02:18AM ET

Home prices, as with aggregate wealth, only really ever increase at the rate of population growth. So if the population of households and home owners is actually declining, as it is today, what does this imply for future home price appreciation and personal wealth? - Alex Pollock, Resident Scholar - American Enterprise Institute

Fortunately, if you have not been unfortunate enough to get sucked into buying a home in the last 12 months at these QE/Cheap debt-fueled prices, consider yourself better off. If you have a house you are trying to sell and want to really sell it, do it now and price it to move.

DR Horton, the nation's largest new homebuilder reported its Q4 and full year results two days ago. I pulled up the SEC-filed financials and dug into them a lot deeper than any Wall Street analyst does, or at least presents to the public. What I found was quite troubling, especially considering that DR Horton is the best possible statistical representation of what is going on fundamentally because it's the largest homebuilder and caters to the middle to lower-middle market demographics.

Keep in mind that headline reports only offer year over year comparisons which, given the amount of QE and Government stimulus pumped into the housing market over the past 3 years, is an easy beat. But I have been analyzing quarter to quarter comparisons for the homebuilders' last two quarters through September because they incorporate the 6 best home selling months of the year on a seasonal basis. The drop in numbers from the June quarter to the September is quite startling, and so far it's been across the board with the companies who have reported.

As an example, DR Horton's new order backlog dropped 17% from its fiscal Q3 to Q4 this year. Please note that its fiscal Q4 includes July and August, which are typically the 2nd and 3rd best seasonal months for sales, so one would think that at best case DHI's orders should have been flat. It's cancellation rate spiked up to 31% from 24% in Q3. That's big. The market was expecting a 25% cancellation rate. The list goes on. You can read my article here: Red Flags All Over DHI's Earnings Report. You will also note that DHI's management has been very heavy sellers the stock this year, especially compared with the scant number of buys - one to be exact in the last 12 months.

If you want to see the true fundamentals underlying the housing market, here it is in 3 graphs - these graphs tell us that the economy is not generating jobs and income to even come close to supporting growth in the housing market - in fact, it's telling us that the housing market is getting ready to drop hard again (please click on the graphs to enlarge):

(Read median household income)