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.