Homebuilders' Shares Hit by Home-Sales Drop

The once bulletproof sector has been looking shakier since July.
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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) - Get Report

,

KB Homes

(KBH) - Get Report

,

Lennar

(LEN) - Get Report

and

Toll Brothers

(TOL) - Get Report

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.

Balloon does sound more sturdy than the usual term normally used, bubble. In a way, it could be more appropriate, because many economists believe that home prices don't necessarily have to go down dramatically with a "big bang," but will likely just start going down gradually.

Also, it's hard to tell from one month to the next if that trend already has begun. Mortgage rates rise and fall with the yield of the benchmark 10-year Treasury bond, which has resumed its downtrend lately. On Tuesday, the yield of the 10-year bond was recently down to 4.18%, while its price rose 8/32.

The July existing-home sales numbers seemed to confirm the bond market's anticipation of a slowdown in economic growth, and less inflation. The 10-year yield has declined this month after reaching 4.39% in late July.

But good news for inflation is not necessarily good news for stocks and housing.

One might expect that because mortgage rates fall as yields fall, the Philly housing index would be performing better.

But looking over the past year, the housing index and the 10-year yield often have moved in the same direction. One could again assume that yields remaining low points to market expectations of an economic slowdown, which can't be too good for housing down the line.

For Cantor Fitzgerald market strategist Marc Pado, the correction in housing stocks started at the end of July. "It may have been the highs," for the year, he says, "but they could back and test those levels again, given that there was no severe reaction, no breaking of support levels."

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The strategist, however, does believe that the broader market has peaked in early August after its big run since April. "We're selling on any rallies," he says.

That broad market correction is expected to last until the end of the year, but the market might make another attempt to test this year's highs around then. That sounds like the predictions of market guru Woody Dorsey of Market Semiotics, although he says all the broad indices have made their highs for the year, as reported

here.

Pado will withhold judgment until the end of the year -- to see how the market's last-ditch attempt at an upside pans out -- before declaring the beginning of a bear market.

Dorsey, however, believes that this year's highs already have been made, and that next year will bring further weakness, effectively calling the end of the existing bull market of the past few years.

In this context, it's hard to imagine how housing stocks will make a big comeback.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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