The 2023 Big Short | The Home Builder Fraud.

housing we've got a disaster reported on

Twitter and while we cannot yet

independently verify this it is a red

flag that has a logical basis

and it's very fascinating so here's an

individual called Jacob

at Raleigh fam

Jacob says the following I'm a new home

sales rep okay let me just explain that

really quick because a lot of people

might not understand what that means it

means you're a real estate agent who

stands at the open house for a home

builder and you try to sell new homes

okay so he's a real estate agent who's

trying to sell new homes

okay all right for a top five American

Builder new home sale reps are a small

community in other words they all talk

to each other

oh he literally says that we all talk to

each other uh Builders are inflating the

numbers uh oh wait a minute Builder

stocks and Builder earnings calls have

actually been very good they've been

bragging about how things are getting

better in December and January and

things are looking up and up hmm but

wait a minute Builders are inflating the

numbers keeping bad contracts and bad

loans on the books

to prevent showing cancellations

uh-oh so what do we have over here he

gives us a chart that shows how uh

cancellations for companies are up

substantially over double for our

Meritage Homes you've got Pulte Home

Group over here double DR Horton you've

got a double uh you've got cancellation

rates basically skyrocketing

and you also have a substantial decline

in net new orders this we've actually

seen in publicly available statistics as

well we know that cancellation rates

have skyrocketed and we know that net

new orders have fallen we already know

that so that's actually not a secret so

statistically we already know that some

of that data is happening but what's

really alarming is this idea that

Builders are potentially inflating the

numbers so what rationale does he give

for inflating the numbers and how could

we potentially deduce truth from that

well first of all uh what else does he

say he says here unfortunately it's

going to get bad okay well that's

anecdotal let's get to where some more

of the Insight is for example in the

past we would immediately cancel or not

even write a contract slash build if we

found you weren't qualified

over the last three months ninety

percent of what we are forced to write

are unqualified contracts because the

qualified buyers are gone

these unqualified buyers won't be able

to close so what we're seeing is all the

new home sales are worthless but we have

a gun to our head that if we don't hit

our quota of three to six homes sold a

month we will be laid off or terminated

so we have to write the contracts but

they won't close

the base prices are too high but we

can't drop the base price because the

backlog under contract won't appraise so

instead we are doing incentives but

incentives stopped working months ago so

Builders are stuck if we drop prices the

already bad contracts will be even more

bad

okay so let me explain this because this

is very tricky if you're not from the

real estate world and I'll try to

explain the potential impact of this

because it is concerning especially

since when you look at companies like

Lennar the darn stocks or I've actually

recovered substantially from their loans

or for from their lows last year in fact

here just go to Google really quick type

in Lennar stock and look at this sucker

over the last year it's up 11 a year ago

from a year ago you look at the last

five year chart the sucker had a dip in

a low in June but it's recovered 57 from

June how does that potentially make

sense when housing prices haven't even

really shown their year-over-year fall

yet maybe it's the perfect short

opportunity uh we'll be talking about

that a lot more by the way in our

trading challenge that we've got coming

up we're officially launching the

uh Team trading challenge for course

members in the stocks and psychology

money group remember of course which you

can get lifetime access to by the link

down below but here is how Housing Works

uh when it comes to new construction

builds so let's say you have a buyer who

comes in on uh today okay so today is

February 11th and they're like hey I

want to buy Lot number 152. so you're

gonna buy lot 152 and you're going to go

under contract for let's say five

hundred thousand dollars but in order to

be convinced to go under contract for

five hundred thousand dollars you're

like well I want twenty thousand dollars

of incentives now that'll buy you maybe

new flooring and it'll cost the Builder

seven thousand dollars to do the

flooring so the Builder actually props

up their margins by giving you this uh

twenty thousand dollar incentive because

they're conv they're giving you twenty

thousand dollars of apparent value which

is what you think you're getting but

you're really only getting seven

thousand dollars of value but that's how

builders make money they want you to buy

upgrades through the Builder that's

where they make a lot of money but

Builders are also making a lot of money

because guess what the lot they built

this property on they built number 152.

guess when that lot was probably

purchased okay and this this gets really

scary are you ready for this guess when

the lot was probably purchased for the

house number 152 that's selling today

2019 or 2020. guess what real estate

prices were in 2020 2019 and 2020 much

lower than they are today

which why is that really interesting

well it means that the Builder margins

are still today being propped up by low

lot sales from 2019 and 2020.

well lot sales in 2021 and 23 and 22 are

much more expensive specifically 2021

which is what we're going to see next

like the 2021 lot sales we'll actually

start seeing those come up in 23 and 24

here right the 2021 lot sales are going

to be extremely expensive relative to

what home prices are likely to be when

they actually start falling more in 23

and 24 and through the rest of really

this year because we're in 2023. so this

the lot prices are way higher now for

the homes that are coming up but the

homes that are selling today are still

selling with low lot prices so it

artificially makes the home builder

profits look high right now so the home

builder profits look high right now

because of a low base cost from low lot

values but when those higher lot values

come in you're going to have a big

oopsie dupsies and those higher lot

values will probably start coming in

later in 2023 three so dangerous for for

housing well for Builders it's going to

be higher lot values uh as uh you know

an input cost for Builders

at the end of 2023 plus right getting

rid of that cheaper previous slot

inventory that is going to be a drag on

the home builders towards the end of

2023 so keep that in mind okay now while

you keep that in mind let's go back to

what this guy on the Twitter thing said

basically about we'll use our example

here lot 152. what is a builder backlog

well when somebody says we have a

builder backlog that we want to make

sure can appraise what they're actually

talking about is under contract deals so

the loser who bought property uh let's

say 150 I don't know let's say 149 okay

so the loser who bought property 149 for

500 000 as well uh January let's say

28th their appraisal is in part going to

rely on the appraisal of the new sales

but it's also going to rely on the

losers who bought property you know like

130 in December it'll say December 30th

there we go December 30th all right so

if the person who bought a home in

December for five hundred thousand

dollars got I don't know ten thousand

dollars in flooring incentives and the

guy who bought the home in uh uh in in

January got uh you know fifteen thousand

dollars in flooring incentives and the

guy who's buying the home now is getting

twenty thousand dollars in incentives

what you're basically doing is you're

technically reducing the value of the

homes without actually reducing the

value of the homes so you're basically

giving people money to artificially keep

home values up in the new home builder

areas because you're you're giving

people incentives to reduce the actual

price of the property without reducing

the appraised value of the property see

when the appraiser goes in to appraise

lot 142 in this example that was sold in

January the appraiser is going to go hey

well what did things sell for in

December 500k sir well what are things

selling for now 500k sir and the

appraiser is like

sounds good to me I guess your appraisal

is five hundred thousand dollars this is

no skin off appraisals it's just the way

the system works that's what the banks

want the banks want the appraisals now

might there be some notes about

incentives sure do the banks really care

no so Landing could potentially be

propped up by artificial artificially

High appraisals because of incentives uh

and and they don't have to be monetary

incentives the Builder could have

already gone in and upgraded the homes

so in theory they don't have to give you

the 20 grand they could just go hey have

this home with fancier flooring and the

appraiser can't really adjust for that

very well because there are already new

homes you're already on a condition

level I think the new construction C1

it's hard to go C1 is is you know even

better than like uh new construction

might be C2 I'm not an appraiser but

basically there are these

classifications and it's hard to say

just because one house has slightly

better flooring that all of a sudden the

entire condition value of that house is

so much more and you have to make an

adjustment for it I'm really going to

skim past this really quick but I'm

basically telling you a home builder can

throw an extra 50 Grand into a house and

it's not going to make it so much

substantially different that the

appraiser is actually going to be able

to make any kind of difference on the

valuation for that generally when you

have valuations that are different

because of the condition it's because

somebody went through and spent you know

five hundred thousand dollars on a

remodel for a five million dollar home

versus somebody else who spent fifty

thousand dollars on a remodel on a five

million dollar home right then you can

get more condition adjustments for stuff

that's new like in other words what I'm

saying is for like the the 99 sent new

flooring to actually make a difference

compared to the seven dollar new

flooring everything in the home needs to

be built to a substantially better

degree for it to actually make a

difference in the appraisals and so the

point of saying that is that home

builders can artificially keep home

values High by just putting in slightly

better flooring and the appraiser is not

actually making a negative adjustment

for that in other words in two months

from now you could still sell a home for

500k and you could potentially put forty

thousand dollars worth of upgrades into

it and the appraiser is not making an

adjustment for it the bear is like well

it looks like we're still 500k that's

called dealing with your backlog that's

making sure your next homes that are

being sold aren't ruining your prior

appraisals that's what this individual

on Twitter is saying and the individual

here is making this argument that people

might not be able to qualify for these

homes but we're writing the contracts

anyway because we basically want to

inflate the numbers because we don't

want to lose our job

so the builders are like you guys need

to sell these homes do whatever you got

to do to sell the homes or else you're

fired and the sales reps are like dude

like nobody's coming in to buy these

homes even because we're giving them

incentives and this is where it becomes

concerning and the the sales reps are

like whatever we'll just write the

contract anyway and send it to the

Builder the Builder just cares about

getting contracts so the sales rep

writes the contract sends it to the

Builder the Builder's like okay got a

contract all right somebody's willing to

pay 500k great sounds great hey

appraiser by the way we got another

contract for 50k we're doing good when

the reality is if that person doesn't

close eventually the cards fall

eventually those deals contract fall

through and cancel and when those deals

fall through and cancel what happens

inventory goes up and that's the biggest

concern that you have for Real Estate is

an increase in inventory so increasing

inventory probably doesn't come from

resale homes because people have locked

in low interest rates right it probably

actually comes from new construction

home builders who are resistant to

large-scale price reductions in the face

of higher rates and what have rates been

doing recently rates have jumped they

came down a little bit in December and

January but they've jumped right back to

nearly uh we're we're on on the path

back to nearly the highs that we had in

October November uh not quite there yet

we are there on the two-year but

mortgage rates generally follow the

10-year treasury yield and the 10-year

treasury is sitting at 37. we went down

to like three three uh just a little bit

ago and we were trending down but now

we're trending up so with rates jumping

and this potential inventory surge

coming from new construction at the same

time as you get year-over-year pain in

real estate you've got the and and you

have Reit liquidations because people

want their money out of rates you got

some potential issues now the

year-over-year numbers are important to

look at we can actually look at some of

the year-over-year numbers by looking at

the Redfin Data Center and it's really

simple that we're going to end up a

Crossing these year over year numbers

which actually finally start creating

fear in the real estate market that oh

my Lord home prices are actually coming

down because right now if you look at

year over year prices a year ago we're

actually still higher than where we were

last year uh nominally see take a look

at this home prices right now national

average sitting at 347. well that's

about one percent higher than where we

were last year in January

and what happens if we stay at 347 and

all of a sudden we get to say March and

we compare to 374. well 374 year over

year uh now became 347. you're down 7.3

percent

now all of a sudden people start getting

nervous and then what happens when we

get to May or June or July we're

actually comparing 347 assuming housing

prices don't fall anymore compared to

388 on a national average home prices

are now down over 10 percent and that's

not even going into some markets where

things are getting ugly uh like oh ooh

Boise is a good one you go to like for

example Boise Idaho what do you have

over here look at that housing prices

are falling even more every single week

so you're looking at 444 divided by uh

547 when you get to that comparison

you're down almost 19 percent

so you do have some serious issues

Coming For Real Estate so the dangers

for housing are these higher lot values

which are going to kill margins for

Builders

in addition to cancellations at Builders

I think that potentially combined with

high values for Builder stocks

actually creates a really good short

opportunity uh for Builders potentially

you know I'm not telling you it's a

guarantee it's certainly not

personalized Financial advice for your

portfolio but anyway there's a huge

danger for Builders and Builder stocks

there's a very big risk of increasing

inventory lowering prices not because

homeowners are selling but because of

rate liquidations and Builders but then

when you get the year-over-year fear

combined with rates jumping you have

even more of a problem

in my opinion in order to actually

prevent a more substantial housing

burden or crash you need to see the

10-year treasure yield get below 2.75

I've been pounding my faces on the table

for over a year now saying the more the

10-year treasury year yield is over 2.75

the more pain you're going to get for

longer and it's been pretty volatile

over here you can see on this chart uh

that the chart is unfortunately trending

up again now hopefully that stops maybe

the CPI report comes in low and the high

jobs report end up everything leads to

disinflation great then you put a floor

under the housing market you get your 15

to 25 correction as I've been talking

about for a year on this channel I've

been talking about this since January of

2022 this 15 to 25 correction coming

people called me in you know crazy now

we've already seen 15 to 20 declines and

there's the potential of even more

declines but I hate to say it this guy's

tweet uh Jacob uh this is bad because

really what you're suggesting is that

home builder stocks are rallying under

uh false pretenses that that really home

builders

unintentionally just because home sales

reps don't want to lose their jobs

you're basically having

inadvertent fraud happening to prop up

uh sales for people who are buying homes

with appraisals that are based on

how's this actually selling

for what somebody is in escrow for you

know next down the line that's the

backlog appraise under false pretenses

that somebody's actually uh uh you know

buying a home after someone else at the

similar valuation that's scary

so you get some real real issues

happening in the new construction space

and I would be very cautious and I'm

potentially considering opening up

shorts on uh on some of the home

builders that I choose I'll be posting

all of the alerts for that uh coming up

probably this week here in the stocks

and psychology money group so stay tuned

for that