Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn

Housing-Market / US Housing Oct 23, 2014 - 10:58 AM GMT

By: John_Mauldin

Housing-Market

By Tony Sagami

Investing is about piecing together different bits of information into an illustrative picture—sort of a Wall Street version of the connect-the-dots game we played in kindergarten.

That’s why the headline below from Bloomberg made my investment antennae stand up and motivated me to look for either confirmation that the real estate market was indeed slowing down or contrary evidence to explain if the weak summer sales numbers were just a temporary aberration.


What that Bloomberg article showed was that home prices in 20 US cities increased at the slowest pace in almost two years ending in July, rising at an uninspiring annualized pace of 0.5%. Those are, by the way, the worst numbers since November 2011.

That’s a change from the healthy real estate gains that we’ve seen for two years, and there are lots of other reasons to think that real estate is headed for a rough patch, if not downright trouble.

Warning Sign #1: Worrywart Homebuilders

You know who knows more about real estate than the Gucci-wearing loafers on Wall Street? The people swinging the hammers and putting their own capital on the line with every real estate project they start.

The National Association of Home Builders index of builder confidence dropped by five points from 59 in September to 54 in October.

Each of the index’s three components were sharply lower in October: the current sales conditions index fell 6 points to 57, expectations for future sales fell 3 points to 64, and traffic of prospective buyers dropped 6 points to 41.

Warning Sign #2: Widespread Use of Sales Carrots

Surveys are useful but far from perfect. A better gauge of builder sentiment is how many incentives—such as upgraded cabinets, wood floors, and high-end appliances—they’ll include to close a deal.

Make no mistake: builders don’t give away incentives unless they have to and builders are giving away tens of thousands of dollars in incentives to goose slumping sales.

“Incentives have increased because builders aren’t selling as well as they would like. … Rather than reducing prices (outright), they use incentives,” said John Burns of real estate research firm John Burns Real Estate Consulting Inc.

A Wells Fargo survey of 150 homebuilders reported that that percentage of builders using incentives rose to 26% from 17% in August of 2013 and 21% in July of 2014.

Homebuilder Lennar admitted that it gave away incentives worth $20,400 per house last quarter. Moreover, that $20,400 amounted to 5.8% of the sales price. That’s a heavy hit on profits!

Warning Sign #3: Sales Slowdown

In a recent report, Toll Brothers warned Wall Street that its sales are slowing. Its sales contracts dropped by 4% in the last quarter and it now expects to sell 5,300 to 5,500 homes this year, down from its previous high-end forecast of 5,850 homes.

Moreover, as the above chart shows, home appreciation is now nonexistent and is threatening to turn negative.

Warning Sign #4: Profit Plunge Next?

Slumping sales and stagnant real estate prices are the precursor to profit disappointment. “Construction of single-family homes has been weak,” said CBRE Global Chief Economist Richard Barkham.

The first homebuilder profit warning was just delivered by KB Home, who is selling fewer and fewer homes. KB Home delivered 1,793 homes last quarter, down from 1,825 delivered in the same period a year ago.

That translated into weaker profits. KB Home reported earnings per share (EPS) of $0.28 on $589.2 million of revenue; however, Wall Street was expecting $0.40 EPS and $646.76 million of sales.

Warning Sign #5: Watch the Real Estate Food Chain

There is a lot more to the real estate industry than just homebuilders—the furniture industry, for example.

Stanley Furniture just reported its quarterly results and delivered a loss of $2.3 million and 5.0% drop in sales.

“The demand for upscale wood residential furniture in the industry’s traditional channels of distribution remains relatively weak,” warned CEO Glenn Prillaman.

My vegetable farmer father was one of those people that thought real estate prices would never go down. The 2008 financial crisis and accompanying real estate crash proved that wasn’t the case and the growing number of worrisome data points are warning me that stocks in all the parts of the real estate food chain could be headed for trouble.


Tony Sagami

The article Connecting the Dots: 5 Warning Signs Point to Real Estate Market Downturn was originally published at mauldineconomics.com.
John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in