Housing Headwinds Update

***The report below is a combination of excerpts from recent reports out of our Financials vertical, let by Josh Steiner. If you are an institutional client or prospective client and aren’t yet receiving Josh’s work on housing, credit, and the financials, please email to learn more about how we can get you setup.***


Case-Shiller Falls Month-Over-Month and Decelerates Rapidly Year-Over-Year

The Case-Shiller Home Price Index fell 0.21% month-over-month in August (non-seasonally adjusted), versus up 0.65% in July. On a year-over-year basis, growth decelerated to 1.6% in August versus 3.1% in July.  


Next Month Will Get Worse, Potentially Much Worse

It's critical to understand the timing associated with the Case-Shiller series.  The printed number is a 3-month rolling average released on a two-month delay, so the August release today is the average of June, July, and August.  Case-Shiller measures closing activity, which tends to lag signing activity by 1-2 months. To compare Case-Shiller to the MBA Mortgage Purchase Applications Index, we should look at applications from April/May/June.  Thus, today's Case-Shiller print is still capturing a benefit from the strong April purchase activity driven by the tax credit.  Next month, the September print will reflect signing activity from May/June/July, which will be substantially weaker than today's release.  Specifically, the average of May/June/July is 13% lower than April/May/June from a demand perspective. With supply remaining at historical highs, we expect prices to increasingly come under pressure.  The chart below demonstrates.  


Housing Headwinds Update - 1


The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  


Housing Headwinds Update - 2


The chart of year-over-year price change below shows another deceleration in August.


Housing Headwinds Update - 3


Existing Home Sales Rise as Prices Fall

Existing Home Sales rose 9.7% to 4.53 million (seasonally adjusted annualized rate) in September.  As Existing Home Sales are a lagging data series, it is still benefiting from a rebound off of the post-tax-credit lows. Below we show charts of existing home sales and median prices.


Housing Headwinds Update - 4


Housing Headwinds Update - 5


Housing Headwinds Update - 6


Housing Headwinds Update - 7


Inventory Remains Near Record Highs

Inventory rose sequentially to 4.04 million, though was reported to bedown 1.9% after an upwardly-revised August print of 4.12 million homes (revised from 3.98mn units). A higher sales rate brought months supply in from 11.6 to 10.5 months.  While this is the second sequential improvement in the months supply series, by historical standards, 10.5 months is consistent with the 2008 highs.  Meanwhile, the median price of Existing Homes fell 3.9% month-over-month from $178,600 to $171,700. 


Housing Headwinds Update - 8


Housing Headwinds Update - 9


New Home Sales Rise 6.6% to 307k - Should We Get Excited?

Don’t be fooled into thinking 307k is a strong number. In fact it is right in line with the average we’ve seen post the tax credit expiration as the charts below show, and it remains consistent with our cumulative displacement theory (republished below) that new home sales will need to remain around the 300k level for the better part of the next ten years, much to the disappointment of those who’ve bet on a snappy recovery over the next 12-24 months.


New Home Sales rose 6.6% to 307k SAAR. Is this a cause for celebration? Remember that it was just six months ago that a then-record-low print of 300k caused significant angst and a material selloff. Since then the numbers have remained in this 300k range. Expectations appear to have come a long way. To summarize our cumulative displacement theory, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300k, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero. Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.  


Housing Headwinds Update - 10


The hangover from the tax credit expiration appears to remain more serious than the pull forward effects. As the following chart shows we are now into our fifth month of unprecedented weakness in new home sales, which begs the question: is there something else going on, something structural? We think the answer to this question is yes, and we explain why we think that in our cumulative displacement analysis below.


Housing Headwinds Update - 11


Taking a longer-term view back to 1993, new home sales continue to decline. The yellow line in the following chart shows the rolling six-month average - the housing equivalent of the 200DMA. This trend line shows no sign of improvement - indeed, it is worsening.


Housing Headwinds Update - 12


Joshua Steiner, CFA


Allison Kaptur

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more