The All-American "Short Squeeze" No One Else Sees

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Everyone knows the U.S. housing "recovery" has been resurrected on slippery ground. But now that we're finally about to slip – big time – no one sees it coming…

Then again, how could they?

The numbers are incredibly misleading…

According to the Commerce Department, new residential home sales in July fell a whopping 13.4% from their June sales pace. And sales in April, May, and June were all revised significantly lower.

Yet according to the National Association of Realtors, existing home sales (completed transactions that include single-family homes, townhomes, condominiums, and co-ops) increased 6.5%… to a seasonally adjusted annual rate of 5.39 million in July, from a downwardly revised 5.06 million in June.

On the surface, the divergence is confusing. But not when you look below the surface, where the real money gets made.

As you'll see (before anyone else), the housing "recovery" is just one giant "short squeeze."

And you can make a flat-out killing the moment it ends…

Meet America's Biggest Home Buyers

The divergence in sales of new homes vs. existing homes can be explained as a function of three factors: investor interest, pricing, and potential appreciation.

In just the last two years, institutional investors, hedge funds, private equity firms, and real estate investment trusts have raised more than $18 billion and bought more than 100,000 single-family homes.

Blackstone Group L.P.'s Invitation Homes unit has spent over $5 billion buying more than 32,000 single-family homes. They are the largest owner of homes in the United States.

American Homes 4 Rent, which went public last month and is the second-largest single-family homeowner in the United States, has spent $3.4 billion buying up almost 20,000 single-family homes and said in their August earnings call that they're spending $100 million a month buying more homes.

These institutional buyers aren't buying new homes in bulk; they're buying existing homes in bulk… and one at a time.

New homes, built by giant national builders like Pulte, Lennar, and Toll Brothers, as well as new homes built by small regional and local builders, are priced according to their cost to build, with hoped-for profit margins added on. Generally, there isn't a lot of negotiating room on prices.

Additionally, new homes are financed by builders' banks who build cushions into their loans. And since loans are "new," they can remain outstanding a lot longer than old loans before banks have to classify them as "non-performing."

That gives builders of new homes greater pricing and staying power. In other words, builders aren't readily discounting their inventories to make them attractive to new home buyers.

On the existing homes' side of the street, there's a lot more room to negotiate…

A Crowd of Highly Motivated Sellers… Who Love Cash

Distressed property owners – banks holding foreclosures, beleaguered individual owners, and short-selling owners (those selling homes for less than their mortgaged loan values) – have all been eager to sell… especially for cash, which institutional buyers readily dangle in front of them.

While institutional investors often pay cash, they are in fact financing the cash they're laying out. With interest rates as low as they are, especially for corporate borrowers able to float their I.O.U.s in the bond market, amassing cash hoards against their stock-based equity collateral (via covenant-lite bond offerings) adds to their massive buying power.

New homes tend to appreciate based on "at-the-market" trends, while existing homes are often perceived as having inherently more room to appreciate. That's because many existing homes were previously valued significantly above current market prices. Homes in neighborhoods that once enjoyed solid appreciation rates but have been deeply discounted are desirable purchases on account of the "bounce-back in price" perception.

That's why existing home sales have held up better than new home sales.

Now let's look at house price appreciation trends, which have been robust to say the least.

Just keep in mind the impact the billions of dollars being applied to the market by institutions is having on pricing trends in the existing home market…

Join the conversation. Click here to jump to comments…

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Brian whitaker | September 6, 2013

    What do you think about REK as an investment into the falling real estate market?

    Thanks,
    Brian

    • Shah Gilani | September 6, 2013

      While it could be a way to play a swoon, it's very small and thinly traded, so be careful to get out of the way if the trade goes against you and only play that ETF with a small amount of capital.

      -Shah

  2. yngso | September 6, 2013

    I stay out of the property mkt. Other stuff is more interesting.

  3. RePete | September 6, 2013

    1st of all, some nut case is using my name on other money blogs and is pretty perverse in his statements. This is the only blog that I use "RePete", so ignore all the rest. What can I say, they are out there. Just look at Facebook for example. 2nd, I'm not sure if this economy can handle another drop in home prices, but it may happen anyway. And the revised lower numbers don't surprise me neither. The employment #'s for the previous months have just been revised down also. And I'm sure the real official inflation rate is way higher than 2%. Lies, lies, lies. Or is this just another ruse to keep QE going longer. Who knows, but it's enough to scare me out of the market again. 3rd time in 5 years. Sit back and watch the fireworks.

  4. goldeye | September 6, 2013

    Hi Shah — I'd be curious to hear your take on the Canadian housing market. Just about "every homeowner" in Canada (Toronto, Vancouver & Calgary especially) believe that the Canadian real estate market is immune to a 2008-10 housing collapse as experienced by notably the U.S., Britain, Spain, Portgugal and others. Canadian housing prices as you may know not only held their values, but actually increased during the recent financial crisis. Canadians' debt-to-disposable income ratio currently is at an all-time high as home owners continue to use their homes' ever-increasing equity as a debit card. Interestingly, wages are just keeping up with inflation. The way I see it, this house-of-cards cannot keep going up forever, and when it does start to unravel things will get ugly. If you have a chance, I'd love to hear your opinion as an outsider to the Canadian housing market. Thanks.

  5. Vickie Mercer | September 9, 2013

    The Pacific Northwest has very low unemployment, a housing shortage and retirees looking to downsize. However, new housing is not being built to accommodate this. Row housing 4 feet away from your neighbor seems to be the only thing being built and this is not what the 60's and 70 somethings are looking for. What is your take on this?

  6. H. Craig Bradley | September 15, 2013

    DOMINO THEORY

    Where are the move-up buyers in the future going to come from in a stagnating economy? Young families will be locked-out in many high cost, low growth coastal markets (say California). Without a stream of new buyers, existing homeowners won't be able to sell at near today's prices. That means they are back underwater and could end up in foreclosure. Down go the neighborhood comps and future property tax revenues. Govt. cutbacks, more tax increases, and eventually, bankruptcy.

    We are possibly headed back to where the market was back in August, 2009 or even lower. That's what appears to be going on in Glendale, CA right now. Young working class families with limited education or skills can only rent, be it a house or apartment. We have one of those who moved-into a house on N. Verdugo Road that sold in May for $560,000 (Probably an investor who bought the property as a rental). Either that, or they got a loan with some help or maybe, its a adjustable rate loan. Good luck with that in a few years.

  7. RePete | September 15, 2013

    HE SAID, SHE SAID

    I am the real RePete. The other guy is some cheap "knock-off" or imposter.

  8. H. Craig Bradley | September 15, 2013

    POTENTATES WITHOUT POWER

    So what if real estate tanks. If your house is paid-off, you have shelter and a place to live. That's all that really matters. You can get buy just fine if you don't have to pay rent to a landlord. Plus, as a homeowner, nobody can raise your rent when your 1 year lease is up or if you are on the outs with the landlord, force you to move somewhere else.

    Neighbors can complain, but they can not trump your property rights, your freedom of speech, or your right to due process. They have no power. Just be good and enjoy your life.

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