SHORTING US HOUSING

Housing Continues to Stumble ... Fade Any Strength from Today's Pending Home Sales Print

 

We've been beating the drum that home sales post the tax credit expiration would be anemic. This morning we get further confirmation. The MBA Mortgage Purchase Application Index, a leading indicator for home sales activity, continued its slide. The index declined 4.1% from last week bringing the decline since April to 28.8%. The decline for the entire month of May is 18% vs the month of April. The last two weeks of data have represented the lowest level of purchase activity since April 1997. For reference, the conforming 30-Year fixed mortgage rate in April 1997 was 8.14%. The rate averaged 4.95% in May 2010. Imagine what purchase activity would look like today without a 4-handle on the 30-year mortgage.

 

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Yesterday the Mortgage Insurance industry association, MICA, released its monthly data for April. Two months ago the improvement in the cures/defaults ratio got investors extremely bullish on the mortgage insurers and housing in general. There was an underappreciated degree of seasonality tailwind embedded in the February data. From this point going forward we'll be on the back side of that tailwind. In other words, it's going to be a headwind from here.

 

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One caveat of note. Later this morning we'll get pending home sales, which should be quite strong, possibly extremely strong. April saw a tremendous amount of demand pull forward ahead of the tax credit expiration and this morning's pending home sales data for April should reflect that. This is a lagging indicator, however, so we would be sellers of any pending home sales-related strength.

 

As a reminder, here are the banks most exposed to residential real estate as a percentage of their loan portfolio. These percentages include residential first lien, second lien, HELOC and 1-4 construction loans.

 

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Joshua Steiner, CFA

 

Allison Kaptur