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Housing Stocks Moving Higher Even Though Existing Home Sales Are Horrendous

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Will this affect the reaction to tomorrow's report on new home sales, which is expecting no change on a month over month basis?

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"I always thought that record would stand until it was broken."
-- Yogi Berra

Let's get right to the point: There's nothing good that can be said about the report that came out earlier. Existing home sales dropped off a cliff -- it's that simple.



But, once the news broke that homebuyers are nowhere to be found, a strange thing happened; several of the companies within the homebuilders space started to run higher.



Is it that the report was no worse than anyone expected? Probably not, as there was an expectation of a -13.5% month-over-month change and a 4.65 million annual pace. Both actual measures fell well short of all estimates.



But, in the spirit of optimism, investors may have clung to the comments made by President Obama shortly after the report. He came out today and mentioned that there was a lot more that needs to be done in the area of the housing market.

Is he hinting at:

  • Perhaps more stimulus?

  • Maybe another credit?

  • Another tax benefit to the homebuilders possibly?

  • Free money for all?


Tomorrow's report on new home sales shows that expectations are coming in at no change on a month-over-month basis. But many of those estimates will probably change overnight, when considering the awful housing report seen today.



Still, it's strange that the homebuilders started to climb. The best explanation is that perhaps they've hit bottom and a touch of short-covering is going on. Or, maybe the idea that an industry consolidation has become more of a likelihood is sparking some interest.

Existing Home Sales Reveal Deep Payback Period

The call of a short and sweet payback period following the expiration of the homebuyer tax credit went out the window with July's existing home sales data.

Total home sales fell 27.2% from 5.260 million in June to 3.830 million in July. Both the rate of decline and the actual sales level were the worst since records began in 1999. The Briefing.com consensus forecast expected sales to fall to "only" 4.72 million.

Surprisingly, the median existing home price was up 0.7%, but this doesn't necessarily suggest that prices are still on the rise. Since the price is not a repeat sales index, the rise in the median price suggests that first-time homebuyers did not have as much of an impact on existing home sales as they did in prior months. Rather, existing home owners were the main purchaser and they stepped up to more expensive properties that were made more affordable by the drop in mortgage rates.

Unfortunately, the purchases of more expensive properties may actually hurt the new home sector. Since the end of 2009, homebuilders changed their building strategies to compete for first-time homebuyers by building smaller homes. According to the existing home sales data, these homes are currently not the most desirable. That may result in a further downturn in new home sales as the new home inventories do not match what is being currently demanded over the coming months.

As a result, tomorrow's new home sales numbers may come in much lower than expected, with a drop below 300,000 homes being very plausible (Briefing Consensus 334,000).

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No positions in stocks mentioned.

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