New Homes Sales For July Plunge: Short Every Homebuilder Rally

by: Dave Kranzler

New homes sales for July plunged to a 394,000 seasonally adjusted annualized rate. This was not only below the 487k expected by the Wall Street brain trust, but it was well below the 450k low end of the consensus range. In addition, the new home sales number for July was revised lower by a considerable amount from the 497k originally reported to 455k. In other words, new home sales in June were 8.5% lower than the market was pricing in.

All four regions except the northeast saw double-digit percentage declines from June. The northeast decline was -5.7%. The supply from just June to July jumped considerably from 4.3 months to 5.2 months. Although the seasonally adjusted annualized rate reflected a 12.7% decline in sales from June to July, if you look at the actual, non-adjusted number the decline from June to July was over 18%. You can peruse the statistics here: Census Bureau New Home Sales.

As I have maintained in my previous Seeking Alpha articles, the current housing market "recovery" is nothing more than a dead cat bounce from the housing market's collapse after last decade's housing market bubble. The bounce was fueled by a couple trillion dollars in Federal Reserve and taxpayer-provided Government stimulus money. This massive stimulus activity has now run its course and the market is fundamentally going a lot lower. I have also argued that the spike up in interest rates in May would crush new and existing home purchase activity.

The July new home sales report confirms my thesis. A new home sale is reported when a contract or sales agreement is signed, which means that the June report reflected a significant number of sales prior to prospective buyers attempting to secure mortgage financing. Clearly just a 1% spike in mortgage rates significantly reduced the ability of many buyers to qualify for a mortgage as reflected by the huge downward revision to June's new home sales number, which represents an extraordinary number of contract cancellations. In fact, we'll start to see much higher cancellation rates in the homebuilder earnings reports this quarter.

The July number more fully reflects the affect of higher interest rates on the ability and willingness of people to buy a home and/or qualify for a mortgage based on income. I discussed the lag affect that higher rates would have on existing homes sales in my last article: Sell Today's Existing Home Sales Report. Imagine what happens if mortgage rates go up another 100 basis points, at which point they'll still be well below the long term historical average.

The bottom line is that the housing market has now resumed its powerful bear market. The housing stocks anticipated this as they peaked and started to decline on May 14. But it's not too late to take advantage of any and all bounces in the housing stocks to either unload positions or establish and add to short positions. Although I was early on my call to short DR Horton (NYSE:DHI), I was able to establish a higher cost basis (roughly $25.50) by adding to my short when the stock moved up from my initial position. I plan on riding DHI down below $5. In fact, I believe that all the homebuilder stocks will go below $5 before the housing bear market is done and many will go bankrupt. After DHI, I like shorts in Toll Brothers (NYSE:TOL), Centex (CTX), Ryland (NYSE:RYL), MDC Holdings (NYSE:MDC), Lennar (NYSE:LEN), and KB Home (NYSE:KBH). KBH is going to start to get buried in litigation from shoddy construction practices. If you have a strong stomach, a short in NVR (NYSE:NVR) can make a lot of money.

Disclosure: I am short DHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.