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

Shah Gilani

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...

Shah Gilani

About the Author

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Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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