Homebuilders' Shares Hit by Home-Sales Drop

Existing-home sales may have declined and the inventory of unsold homes on the market may have increased in July. But as any bull on housing will tell you, the housing market remains red-hot.

Pundits and stock pushers will also tell you that because everyone's talking about the housing bubble -- and about how it's seemingly deflating a bit -- then it's not really happening, and there's nothing to worry about. Hmm, if that doesn't sound like delusion, then what does?

The denial is more acute as there may be signs that the smart money is bailing out of housing stocks. Taking a look at the Philadelphia Stock Exchange Housing Index since late July, it's hard not to notice the downtrend. After hitting an all-time high of 586.06 on July 28, the index has fallen nearly 10% through Monday's close.

The housing index was recently down another 1.6% Tuesday after the National Association of Realtors said existing-home sales dropped 2.6% in July to 7.16 million, compared with economists' average forecast that sales would fall only 1.1%. Among larger names in the sector, Beazer Homes (BZH), KB Homes (KBH), Lennar (LEN) and Toll Brothers (TOL) were each recently down more than 2%.

The housing news also led to weakness in the broad averages, with the Dow Jones Industrial Average recently down 54.53 points, or 0.52%, to 10,515.36. The S&P 500 was off 5.76 points, or 0.47%, to 1215.97. The Nasdaq Composite dipped 8.28 points, or 0.39%, to 2133.13.

Looking at the bright side of things, you can say June sales were revised upward to 7.35 million from 7.33 previously, and that the July number was still the third-highest on record.

For the NAR's chief economist, David Lereah, it's only "some air coming of those balloons," which is not the same as a balloon popping.

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