Author Archives: Bone Fish

Existing Home Sales Drop For 7th Straight Month As Homebuilders Stocks Collapse

With US home builder stocks having their worst year since 2007, hope is high that September will show the long-awaited rebound in home sales (despite a soaring mortgage rate).

After ‘stabilizing’ unchanged in August, existing home sales were expected to drop 0.9% MoM in September, but instead August’s data was revised notably lower and September plunged… down 3.4% MoM – the biggest drop since Feb 2016.

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With SAAR at its lowest since Nov 2015…

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This is the seventh month in a row of annual declines in existing home sales…

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Sales fell across all price ranges (not just the low-end as we have seen recently).

Median home price rose 4.2% from last year to $258,100

And you can’t blame supply as it rose notably – 4.4 months supply in Sept. vs. 4.3 in Aug.

As NAR notes:

“This is the lowest existing home sales level since November 2015,” he said.

A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.”

“There is a clear shift in the market with another month of rising inventory on a year over year basis, though seasonal factors are leading to a third straight month of declining inventory,” said Yun.

“Homes will take a bit longer to sell compared to the super-heated fast pace seen earlier this year.”

Home builder stocks are collapsing…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-19_6-45-35.jpg?itok=cfiJpBtt

This is the worst year for home builder stocks since 2007…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-19_6-50-06.jpg?itok=J0Hgbodc

Probably nothing. Just keep hiking rates.

Source: ZeroHedge

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Trader: “Well I Think There’s A Problem Here”

For those looking for key market inflection points, BMO’s Brad Wishak highlights a divergence that was a key tell for recent market action, and may portend even more pain in the coming weeks.

According to Wishak, one place that telegraphed the recent market turmoil was the venerable New York Stock Exchange: the NYSE is the worlds largest stock exchange by market cap (21 trillion) yet “seems to get very little main stream attention for reasons I’ll never understand.”

And, Wishak adds, “when the largest stock exchange in the world throws up a few negative divergences, I want to listen” for the following three reasons:

  • While the other major indices are hugging their 200 dma, the NYSE is firmly through it
  • Additionally, the 2018 Channel trend line support broken
  • But the biggest tell for me took place in September….while all the other majors were marking fresh all time highs, the largest exchange in the world wasn’t even close to confirming ….this doesn’t happen often………another one for the radar

https://www.zerohedge.com/sites/default/files/inline-images/wishak%20oct%202018.jpg?itok=xnycGL86

From Russia With Love?

Russia Dumps US Treasuries As Rates Climb

As predicted, Russia has reduced its holdings of US Treasuries as US rates continue to rise.

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But Russia is a relatively small player in the US Treasury market (unless they are using proxies like postage-stamp sized Luxembourg, Ireland or the Cayman Islands).

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As The Federal Reserve SLOWLY unwinds its balance sheet, the Confounded Interest blog is surprised that Japan and China have not unloaded MORE of their Treasury holdings.

Source: Confounded Interest

Mortgage Applications Collapse To 18-Year Lows

After sliding 2.1% the prior week, mortgage applications collapsed 7.1% last week as mortgage rates topped 5.00%

Ignoring the collapses during the Xmas week of 12/29/00 and 12/26/14, this is the lowest level of mortgage applications since September 2000…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-17_5-01-53.jpg?itok=w_KjBWqP

The Refinance Index decreased 9 percent from the previous week

The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 2 percent higher than the same week one year ago.

Perhaps this is why…

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since February 2011, 5.10 percent, from 5.05 percent, with points increasing to 0.55 from 0.51 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

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Still, The Fed should keep on hiking, right? Because – “greatest economy ever..” and so on…

As we noted previously, the refinance boom that rescued so many in the post-2008 ‘recovery’ is now over. If rates hit 5%, the pool of homeowners who would qualify for and benefit from a refinance will shrink to 1.55 million, according to mortgage-data and technology firm Black Knight Inc. That would be down about 64% since the start of the year, and the smallest pool since 2008.

Naturally, hardest hit by the rising rates will be young and first-time buyers who tend to make smaller down payments than older buyers who have built up equity in their previous homes, and middle-income buyers, who can least afford the extra cost. Khater said that about 45% of the loans that Freddie Mac is backing are to first-time buyers, up from about 30% normally, which also means that rising rates could have an even bigger impact on the market than usual.

Younger buyers are also more likely to be shocked by higher rates because they don’t remember when rates were more than 18% in the early 1980s, or more recently, the first decade of the 2000s, when rates hovered around 5% to 7%.

“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.

Source: ZeroHedge

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Mortgage Refinancing Applications Remain In Death Valley (Hurricanes Michael And Jerome)

Between Hurricanes Michael and Hurricane Jerome (Powell), mortgage refinancing applcations are taking a big hit.

The Mortgage Bankers Association (MBA) refinancing applications index fell 9% from the previous week as 30-year mortgage rate continued to rise.

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Mortgage purchase applications fell 5.52% WoW, but it is in the “mean season” for mortgage purchase applications and there was a hurricane (Michael). And then you have hurricane Jerome (Powell) battering the mortgage markets.

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In addition to Hurricane (weather and Federal government), there is also the decline in Adjustable Rate Mortgages (ARMs) since the financial crisis.

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Why Used Car Prices Are Plunging

(Blinders Off Research) We have been testing the upper limits of used vehicle pricing (and new) all year. I think we have finally reached a point where the consumer has started rejecting higher prices (used vehicles for now). There were a couple of events last month that raised concern ahead of the most recent used car and truck CPI report:

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2. There was a significant drop in used vehicle values during the last week of September.

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The sudden increase in used vehicle inventory is a strong signal that the rate of sale has slowed due to price increases that consumers are not willing to absorb. Most retail dealers have a rigid 60-day cut off for used vehicle inventory. As a vehicle nears the 60-day mark, the dealer is forced to heavily discount that vehicle or face an even greater loss by disposing of it through wholesale auction (60 days of depreciation, reconditioning expense, transportation and auction fees). This is also likely related to the sharp drop in used vehicle values during week 4 of September as retail dealers returned to auction and adjusted their bids after realizing the vehicles they previously purchased did not sell at the prices they anticipated.

New and used inventory levels are still showing a draw YTD, but the rate of change is concerning. I am completely convinced that the strength we’ve seen in both new vehicle volume and pricing this year is due in large part to the incredibly strong performance in used vehicle values. If the recent trend in used vehicle values changes, things could get ugly and FAST!

Additionally, take note of the dip in time to equity from 2006-2007 and how similar it is to the dip in 2018. It took this year’s used vehicle appreciation  in order to offset the consistent increase in loan terms since 2009. If used vehicle values roll over, we have the same exact setup that led to the spike in time to equity from 2007-2008.

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I would take the drop in used car and truck CPI as a serious warning with larger implications to come. I am still confident in Q3 earnings for manufacturers, retail dealers and rental car companies but would proceed with caution going forward.

Source: ZeroHedge

Violence, Public Anger Erupts In China As Home Prices Slide

(ZeroHedge) Last March, we discussed why few things are as important for China’s wealth effect and economy, as its housing bubble market. Specifically, as Deutsche Bank calculated at the time, “in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice their total disposable income of RMB12.9 trillion.” The German lender added that this (rather fleeting) wealth effect “may be helping to sustain consumption in China despite slowing income growth” warning that “a decline of property price would obviously have a large negative impact.”

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Naturally, as long as the housing bubble keeps inflating and prices keep rising, there is nothing to worry about as the population will keep spending money buoyed by illusory wealth appreciation. It is when housing starts to drop that Beijing begins to panic.

Fast forward to today, when Beijing may be starting to sweat because whereas Chinese property developers usually count on September and October to be their “gold and silver” months for sales, this year has turned out to be different. As the SCMP reports, not only were sales figures grim for September, but the seven-day national holiday last week also brought at least two “fangnao” incidents – when angry, and often violent, homeowners protest against price cuts offered by developers to new buyers.

These protests are often directed at sales offices, with varying levels of intensity – from throwing rocks to holding banners and putting up funeral wreaths. The risk, of course, is that as what has gone up (wealth effect) will come down, and as home ownership has remained the most important channel of investment for urban households in China in the past decade, price cuts have become increasingly unacceptable and a cause for social unrest.

Just last week, angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.

A similar incident took place in suburban Shanghai, where the same developer slashed prices at another project called One Mansion by a quarter.

While the protests have been isolated so far, the risk is that the greater the slide in property prices, the more widespread popular anger will become:

“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities.

Or fall at all, for that matter.

While China’s stock market has had its ups and down, along the way accompanied by various “rolling” bubbles affecting assored Chinese assets, China’s property market has soared since the 2000s making home ownership the quickest way to gain wealth. In Beijing, homes that went for an average of around 4,000 yuan (US$580) per square metre in 2003 are now above 60,000 yuan (US$8,600) a square metre, according to property price data provider creprice.cn.

And, in a page right out of Ben Bernanke’s playbook, who in 2005 claimed that “we’ve never had a decline in housing prices on a nationwide basis” and as a result never would, what is now taking place in China is nothing short of a shock to the general population: “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao said.

Meanwhile, dreading that this moment would eventually come, the government has been working on measures to cool property prices for years, calling residential real estate not only an economic issue but also “an important issue for people’s livelihoods that influences social stability”, in a directive back in 2010.

And while the industry remained strong in the first eight months of the year it started slowing last month, according to data provider China Real Estate Information Corp. Official statistics showed that in Shangrao, where the violent protest occurred, transactions of homes last month fell by 22% from August and 18% from the same month last year. In Shanghai, sales in the past five weeks have risen slightly from the same period last year, but average prices dropped in September by over 3% from August and 1.4% from the same period last year.

Quoted by SCMP, Zhang Dawei, chief analyst at Centaline Property, warned that not only were the overall sales dropping, but poor construction quality could also be a cause for more violence. “Try not to buy homes built in 2018, because while the developers were short of money, the same is the case with contractors,” he said, and had an even more ominous warning about what’s coming: “The fourth quarter would be a peak time for residential project completion. Issues which used to be papered over by rising prices could erupt in this period… so we should look out for a sudden surge [public violence] in the coming months.”

Ultimately, it’s all a question of public expectations: expectations that have been number following years of government bailouts and bubble reflating, making sure that every single drop in housing was promptly offset.  Hu Xingdou, a Beijing-based economist, said despite China’s market-oriented reforms 40 years ago, investors still lacked respect for market and social rules.

“They don’t have the spirit of contract, and they always think they can fight against the rules,” he said. “As a commodity, the value of homes can both rise and fall. Investors should obey this fundamental rule.”

But why should they if until recently, policymakers did everything in their power to avoid them this simplest of lessons.

To be sure, public anger at falling prices is hardly new. Rampaging against price cuts was first seen in 2011, when homebuyers of a residential project named Oriental Rose in Beijing’s Tongzhou district mobbed a Huaye sales office after the firm cut prices by a tenth.

Similar incidents have erupted whenever investors have found their property value depreciating. And, in a country where there are relatively fewer investment channels and an unpredictable stock market, such protests are always couched as a struggle to protect individual rights. In many such cases, protesters demand compensation or cancellation of their purchase, and in order to prevent further social disorder, developers often accept their demands.

In other words, moral hazard in China is so pervasive, it threatens the very fabric of society.

Wang Cailiang, director of the Beijing Cailiang Law Firm, said although fangnao was against the law, the government had tolerated such protests because it was ultimately responsible for the surging prices; and it is better to punt to the real estate company than being forced to directly bailout consumers.

“It was the government that pushed up the prices by profiting from selling land to developers in the past two decades,” he said. “Now public anger over home prices has become a major social issue.

At a meeting of the Communist Party’s Politburo in late July, top officials reiterated that “containing home price gains” would be a priority in the second half of the year. Of course, if home price losses accelerate to the downside, Beijing will have no choice but to scramble and reflate another bubble, even as the Trump administration scrutinizes every monetary and fiscal decision by Beijing with a fine toothed comb.

Meanwhile, anger is only set to grow, the only question is whether it will be a slow boil or a violent eruption. Economist Shao expected average home prices to drop slightly in the coming months as the government continued efforts to control them.  In the first two weeks of September, growth was close to stagnating in 40 major cities across the mainland with the total number of new home sales up by just 1% from the previous month, according to China Real Estate Information Corp data.

Should this slowdown accelerate significantly to the downside, then the “working class insurrection” that China has been preparing for since 2014…

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… will finally materialize with dire consequences for the entire world.

Source: ZeroHedge

SF Bay Area Realtor Caters To Mass Exodus Out Of The Region

A real estate brokerage near San Francisco is capitalizing on the mass exodus out of the Bay Area. 

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According to an April report by a Bay Area advocacy group, 46% of locals say they want to move out of the area within the next few years, citing the high cost of living and skyrocketing housing prices as main reasons for wanting out. In February, CBS San Francisco reported that the number of people packing up and leaving the Bay Area has reached its highest level in more than a decade. And fo the first time in ages, the number of people leaving are outnumbering the people coming in.

Meanwhile, a statewide poll conducted by UC Berkeley last year revealed that 56 percent of voters have considered moving due to the housing crisis – and 1 in 4 of those residents said they’d leave the state.

Some are already making good on that promiseData from earlier this year confirms that Sacramento is experiencing its highest rate of domestic migration in over a decade.

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Catering to the exodus

To serve the real estate needs of soon-to-be former Bay Area residents, East-Bay broker Scott Fuller – a real estate broker of 18 years, launched LeavingTheBayArea.com, which helps clients design a relocation strategy. After helping clients sell their home “within a timeframe that works for you,” Fuller will “partner you up with a real estate specialist” in the desired destination city in order to perform an “in-depth needs analysis” in order to coordinate the move.

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Fuller says that the majority of his clientele are retirees looking to cash out and move to cheaper pastures in areas such as Portland, Las Vegas, Reno, Dallas, Austin and cities in Arizona. Those looking to remain in California have been moving to Folsom and El Dorado Hills.

Source: ZeroHedge