Hey There Income Hunter,

 

Uh-oh.

 

Forward-looking data on the housing market is starting to come in as bad as the data from the 2008 housing crisis.

 

There is no way the market is priced for this and, based on what Jay Powell has been telling us, there is no way he will step in any time soon. 

 

It is getting so difficult that Wells Fargo (Ticker: WFC), who has always been one of the biggest players in the mortgage business, announced it will no longer acquire new mortgage customers. 

 

Another significant change that will hurt the industry is WFC will no longer buy mortgages from other lenders, either. This will reduce liquidity in the market just as it may start to unravel. 

 

Today, I’ll share data and a recent trade I executed to participate in a further decline in housing. 

 

Existing Homes Sales Take Out Covid Low

 

Existing home sales fell 1.5% month-over-month in December after falling 7.9% in November. It is getting very close to levels hit in 2008.

Units Completed vs Units Under Construction

The chart below illustrates the spread between housing units completed and those under construction. This is causing many people to walk away from their offer to complete the purchase of a new home. 

 

 

This backlog of inventory is causing a massive rise in cancellation rates. This means that offers for new homes are being canceled and buyers are walking away from their deposits … 

 

The cancellation rate spiked to 68% in Q4 from 35% in Q3 and up from 13% in Q4 2021. 

 

Sixty-eight percent is beyond the worst levels hit in 2008, when the average rate was around 47%. 

 

That is insane!

 

And it’s definitely something you will not hear from the mainstream media because it will create fear in the markets. 

 

What’s the Trade?

The most liquid way to play for a deeper adjustment in prices and losses in the industry is to purchase a bearish option strategy on the SPDR Series Homebuilders Trust ETF (Ticker: XHB) . 

 

I will consider a calendar spread where I can purchase a put out to the March 17 expiry (or further) and sell shorter-dated calls to Feb. 03 – rolling further out every couple of weeks to fund my purchase while I wait for a drop.

 

Notice the XHB chart below that the ETF is sitting just below resistance from $65-$70. Meanwhile just to get back to the lows would take XHB down to $53-$55. Think about the fact that in 2008 XHB reached a low of $10. 

 

 

Bring It Home

The housing market is hugely important for the economy. So much production and economic activity flows through housing. 

 

The problem is, after decades of zero percent interest rates, everyone got comfortable assuming it would stay this way forever. 

 

Well, now money supply is shrinking while interest rates and the costs for essential goods have risen. 

 

Eventually, the Fed will be forced to help … but first it will have to reach 2008 crisis proportions, so getting out ahead of these trends will help you come out ahead in the long run. 

 

If you need a little push, watch The Big Short this weekend and as always …

 

Live and Trade With Passion My Friend,

Griff