If you tell a lie big enough and keep repeating it, people will eventually come to believe it - Joseph Goebbels, Hitler's Propaganda MinisterMany of you woke up yesterday to news that existing home sales for October were higher than expected and that the homebuilder sentiment index had reached a 6-yr high. This morning, housing starts were reported and were better than expected, although this reading was achieved by revising last month's data report lower. All three data points are being promoted as evidence that housing was recovering. See the quote above.
To put a "truth" dent into the existing home sales report, the data as it's being promoted is not supported by fundamental evidence. For instance, with existing home sales, although there was an increase, it would look to be as a result of investment in rental buyers and maybe some speculators. If you review the mortgage purchase application data for September and October, there has been a definitive downtrend. "Organic" buyers who are buying a home to live in as a primary residence - the bread and butter of a healthy housing market - require mortgage financing in order to purchase a home. The data being reported on mortgage purchase applications does not indicate that the existing home sales are being purchased by this type of buyer. Here's what I'm talking about: LINK
As we know, there has been an accelerating trend of hedge fund/private equity investors who are going into areas and buying up "blocks" of vacant homes. These are cash buyers, or buyers who have access to credit that is a lot cheaper than mortgage financing. A preponderance of this type of buyer in October would explain a possible jump in existing home sales. Interestingly, it was reported about a month ago that one of the first big hedge funds to jump into this type of deal, Ziff-Ochs, is in the process of trying to unload 80,000 homes in northern California. They discovered that being a landlord does not justify the cash on cash return on investment. It probably won't take long for monkey-see monkey-do imitators to discover the same thing, and at some point the existing homes being bought now will be reintroduced to the inventory pool of homes for sale...
As for the homebuilders sentiment index, it's just that: sentiment. If there's a prototypical "touchy feely" economic indicator, it's any of the sentiment index reports. After six years of getting their ass kicked by the market (Dow Jones Homebuilding Index is down 60% from it's 2005 peak), this index would be reflecting a dead-cat bounce in "hope." I would rename that housing market indicator as "the builder hope" indicator. Think of it as a "hope" box, or a "god" box - lol.
Finally, with regard to whether or not the average middle class person even has the income to support buying a home, we know that personal income, especially on an inflation-adjusted basis, has been declining for several months now. Furthermore, if you look at the best grassroots indicator of business formation and potential hiring - capital expenditures - it would appear that big corporations are not only NOT spending money on capital formation, but bona fide hiring is not taking place and we'll probably see an acceleration in corporate layoffs. How can the middle class be buying homes right now when many of them know they might not have a job next year? Here's an article from yesterday's Wall Street Journal that sums it up best - "Investment Falls Off A Cliff:" LINK
Quickly, with regard to today's housing starts number, suffice it to say that it was a "seasonally adjusted annualized" number that hit the headlines. As we've seen in previous posts, these seasonally adjusted numbers could also be called "robustly manipulated fallacious statistics." If you peruse today's full release from the Census Bureau: LINK, you'll discover that the headline number was actually below the revised number for September. Moreover, you'll see that actual construction starts are lagging permit applications - badly. Last, I have discovered by perusing the latest homebuilder quarterly reports that cancellation rates are starting to spike higher. They have been - in general - running in the low-high teens, and now they are running in the high 20% to low 30% range. This factoid is not being reported in the headlines or in the main stream media. What this means is that new home sales reports and housing start reports are egregiously overstated, since new home sales data are based on contract signings, which now have a 30% chance of being cancelled.
Bottom line is that housing is not only NOT recovering, but the elitists in NYC and DC are putting their best spin possible on what is being reported. The truth is that housing is getting ready to follow corporate capital investment off the cliff...