I believe the real estate crash has started, ever so slightly. How long it takes before it comes tumbling down will depend on the bond market in the coming weeks. As the bond market implodes, interest rates will continue to rise naturally and that will cause higher interest rates on mortgages, which will crash an already over-inflated real estate bubble.
If you’re not familiar with how bonds work, bonds crash as yields go up. It’s simple really, investors holding bonds want the highest return possible, so when yields rise, investors sell their lower yielding bonds, because no one will buy them if they can buy a bond with a higher yield. The lower yielding bonds begin to lose value rather quickly and that’s what is happening now.
This causes bond prices to go down and bond yields to skyrocket. When bond yields go up, that’s bad for the economy because the cost to borrow money rises and that typically slows economic growth.
Ever since the election, bond yields have been soaring, in fact we have seen a jump in yields of a full percentage point since last summer. This effects many things tied to our economy, such as mortgage rates.
Mortgage rates have already risen to above 4% on a standard home mortgage based on good credit. It’s even higher for people with marginal credit which is a score below 700, which makes up the majority of American home buyers.
As mortgage rates climb higher, more potential home buyers will be priced out of the market reducing the demand for real estate. These higher rates will also affect auto loans, student loans and credit card debt.
The imploding bond market will also have an effect on the stock market, as economic growth slows from a current stagnant economy to a virtual non-existent economy. Stock earnings will falter causing the price to earnings ratio to soar.
The current global economy is lethargic, at best, and any slowdown from here could turn a trickle into an avalanche. Don’t let the current rise in the stock market fool you, the current rise has nothing to do with improving economic conditions and this could be the final push before the manure hits the fan.
Stocks historically crash after a collapse in the bond market and we are witnessing a major correction in the bond market right now. If bonds continue to fall over the coming weeks, the stock market will not be far behind, especially if the FOMC raises rates on December 13th, as predicted.
This will cause a doubling down on higher rates to come and I expect the stock market to react negatively shortly thereafter and gold to surge. Trump will be sworn into office on January 20th, 2017. The markets could be in total correction mode by that time, just in time to blame Trump for the imploding economy.
Shorting housing stocks at this juncture may be a good trade as the bond market continues to fall. I suggest watching the bond market for continued weakness and also looking at the charts of some of the largest housing stocks like DR Horton (DHI), Toll Brothers (TOL) and Pulte Homes (PHM). I’ve added this sector below to watch over the coming weeks.
Gold and silver were hit hard in November, especially as we reached options expiry last week for the COMEX and this Wednesday for the LBMA. The commercial banks wanted to make sure all of their short positions were covered and now we’ve reached a point in which the commercials are net long in the metals.
The shorts have been rinsed and we should expect a new surge to the upside starting in December, especially after the FOMC meeting on December 13th. Several indicators confirm my point below.
The chart above from SentimenTrader shows that investors have reached extreme pessimism stage (near zero) for gold and this is a bullish contrarian indicator. In addition, SentimenTrader has now lowered the risk for gold substantially to a 2 on a scale of 1-10. (Reprint from King World News)
Below, we also have the chart of (BPGDM), which is the Gold Miners Bullish Percent Index. This chart has bottomed and is signaling a confirmation that a move up in the metals is eminent.
(Reprint from Jeff Clark at Stansberry Research)
Thursday’s chart of gold below shows how the bankers forced the price of gold down to 1175 just in time for options expiry on November 30th. As you can see, the Stochastic Oscillator has bottomed at zero and has no place to go but up.
I expect gold to climb up to resistance around 1300 during the month of December. If the FOMC decides to raise rates as expected, then we could see gold surge past the resistance level in late December or early January.
Anyone holding January 2017 options may still have a chance to profit if this scenario plays out. We will have to watch our positions closely and be prepared to roll them over into late 2017 or January 2018 contracts.
Stock Market: (SPY) (QQQ)
A chart of the S&P shows that it has begun to roll over after the initial Trump exuberance. The Stochastic Oscillator has definitely topped out and a retrace back down is expected.
If the bond market continues its downward spiral, I would expect that to put pressure on stocks, especially if the 10 year Treasury rate rises to 2.75 or above. It’s currently around 2.36%.
We’ve had a waterfall decline in the 10 year Treasury as shown in the chart below (see blue arrow) and any additional declines from here will result in a steep rise in the interest rate.
I wouldn’t be surprised to see rates exceed 2.75 in the coming weeks and with all the other indicators factored in, we could see a rather steep correction in stocks come January.
The FOMC meeting will also add pressure to an already overbought stock market if they raise rates on December 13th as expected.
I’m not shorting stocks at this time, as I want more confirmation to the downside, but I believe we will get that after the FOMC meeting and later in December and early January.
Energy Stocks: (XLE) (UNG) (USO) (LNG)
Crude oil experienced a steep rise after the announcement from OPEC of the coming production cuts. Personally, I think anything coming out of OPEC meetings tends to be smoke and mirrors and in this case the recent surge retraced at resistance.
I’m not convinced this recent surge will push through resistance, so if you have a position in oil at this time, I would suggest you tighten your stops and prepare for a bounce to the downside. If it doesn’t come, then enjoy the ride.
Housing Market Stocks: (DHI) (TOL) (PHM)
Toll Brothers (TOL) shown below crashed back in January, but then recovered slightly. The crash was created by the Feds interest rate hike last December of only .25 basis points.
This created panic in the home building industry as investors thought that a higher interest rate would cause higher mortgage rates and price home buyers out of the market.
Think what will happen now that interest rates are surging due to the bond market implosion. If the fed raises rates in December, that will create double jeopardy and we will see a Déjà vu from last year, only the reaction should be much stronger.
(TOL) bounced off of resistance and appears to be headed back down (See below). If this is confirmed in the next few days, I would consider a short position just in time for the FOMC meeting coming up on December 13th. If they raise rates, as expected, we could see a crash in all of the home builders.
Same thing happened for DR Horton (DHI) and Pulte Homes (PHM) shown below. Both are setting up for a fall in the coming weeks and months.
If you’re an options trader, I would buy slightly out of the money PUT options at least 6 – 8 months out.
(SLW) January 2018 CALLS
(GDX) January 2018 CALLS
(RGLD) January 2018 CALLS
(SPY) December 2017 PUTS
(DHI) August 2017 PUTS
(TOL) August 2017 PUTS
(PHM) August 2017 PUTS
San Fran Home Sales Crash To Lowest Level Since
2008 As Pricing Reset Gets Underway
“The 35.7% decline in distressed property sales drove the overall decline in Bay Area sales to its lowest level since 2001. The persistent trend of sluggish sales amidst rising prices has been the story for over a year now.”
Marc Hanson: "Houses Have Never Been More Expensive To Buyers Who Need A Mortgage"
It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying. The recent rate surge has taken "UNAFFORDABILITY" to such extremes that prices, rates, and/or credit are now radically out of scope.
US Home Prices Rise Above July 2006 Levels, Hit New Record High
Almost exactly ten years after the last housing bubble burst, unleashing a dramatic crash in US real estate prices today Case Shiller reported that as of September, its Index covering all nine U.S. census divisions, surpassed the peak set in July 2006 as the housing boom topped out, and in doing so the average home price has now climbed back above the record reached more than a decade ago.
Pending Home Sales Stall Even Before Mortgage Rates Spiked
Pending Home Sales rose just 0.2% YoY in October, among the weakest of the year. This is made more troublesome since these sales occurred before the election, before the mortgage rate exploded higher and before mortgage applications collapsed...