Is Housing Market Setting Up a Classic Pump and Dump? (8/21/2013)

Everyone is talking about the "recovery" in the U.S. real estate market as evidenced by recent home sales data.

There has been speculation that rising rates have pressured some REITs, investor groups, and hedge funds into buying a house now, before home prices rise further. If that was happening, we would expect to see existing home sales spike as bond yields rise. Take a look at the existing home sales chart below.

existing-home-sales

Clearly we have had a spike move up in July of 2013. That's an unsustainable trend. This is precisely what we would expect to see in a chart where a lot of investing groups were rushing to close sales before house prices moved higher due to rising bond yields.

home-salesWe have more proof than just the chart above. Lawrence Yun, the chief economist for the National Association of Realtors (NAR), today said, "The initial rise in interest rates provided strong incentive for closing deals." It's official. Rising rates did in fact cause a surge in existing home sales. The surge is so spiky that we have not seen this level of buying since 2007.

We have formed the front side of a spike in existing home sales and at some point soon, existing home sales are going to come crashing back down like all spikes eventually do.

We know existing home sales are setting up for a pump and dump move because as bond yields rise, the price of a house becomes more expensive meaning there will be fewer buyers. Lawrence Yun even acknowledged this in his speech today saying, "However, further rate increases will diminish the pool of eligible buyers." We know this is true from the chart below that shows 30 year bond yields versus the stock price of DR Horton.

30-year-bond-chart-dr-horton-chart

Home builder stocks like DR Horton lead the economy and the real-estate market by 3 months to 2 years. The plunge in home builder stocks is telling us that a crash in the U.S. housing market is coming as rising rates kill the fragile U.S. housing market recovery.

Below is speech from Lawrence Yun, NAR chief economist, today in Washington on the state of the U.S. real estate market. Keep in mind that Lawrence Yun is a pundit for the real estate market and so he's going to talk it up any chance he gets, but even so, notice what he says about rising rates causing a rush to close deals and also how rising rates will diminish the pool of buyers. Check out his speech and let me know what you think in the comments section below.

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