New short trade - PHM:NYSE

Given my overall bearishness for the market at present and my belief that the US residential market is doomed for the next 10 years, I've gone short Pulte Homes on the hourly chart.  The price has just retraced to the Fibonacci .618 level and I've gone short at that level with my stop just above yesterday's high, which is just outside the downtrend line.

As far as the US housing market is concerned, there is still a huge demographic headwind, as 80 million baby boomers try to sell houses to 65 million Gen Xer’s, who earn half as much money. Don’t plan on selling you home to your kids, especially if they are still living rent free in the basement. There are six million homes currently late on their payments, in default, or in foreclosure, and an additional shadow inventory of 15 million units. Access to credit is still severely impaired to everyone, except, you guessed it, the 1%.

Fannie Mae and Freddie Mac, which supply 95% of all the home mortgages in the US, are still in receivership, and are in desperate need of $100 billion in new capital each. Good luck getting that out of Washington, which is likely to be gridlocked for at least another five years, and maybe more.

The home mortgage deduction is a big target in any revamp of the tax system, which would immediately yield $250 billion in new revenues for the government. How do you think that will impact home process?

There are undeniable signs of life in best prime markets, where the pent up demand can be substantial. In the San Francisco Bay area you are seeing bidding wars for anything that is commuting distance from Apple, Google, and Facebook, or the rest of the booming tech world. Real estate is more local now than it ever has been.

 

However, overall, in my opinion, the best case scenario for home prices is that they continue bumping along a bottom for as long as ten more years, when the demographic picture shifts from a huge headwind to a major tailwind. The worst case is that this is just another bear market rally and that there is another another 20% on the downside.