One of the proprietors of StockBoardAsset.com tweeted about two weeks ago wondering when the stock market was going to start pricing in a slow-down in the economy. To that I responded by pointing out that the DJ Home Construction index is starting to price in a housing market crash. Residential construction + all economic activity connected to selling and financing existing homes is probably around 25-30% of the GDP when all facets of the housing market are taken into account (realtor activity, mortgage finance, furniture sales, etc). It’s quite surprising to me that almost no one besides the Short Seller’s Journal has been pounding the table on shorting the homebuilders.

In the mid-2000’s financial bubble, the housing market’s demise preceded the start of the collapse of the stock market by roughly 18 months. This is what we are seeing now. Again, to rebut the tweet mentioned above, the homebuilder stocks and the housing market are strong leading indicators.





The chart above is the DJ Home Construction Index on a weekly basis going back to April 2005. The homebuilder stocks peaked in July 2005, well ahead of the 2008 financial system de facto collapse. Back then the index plummeted 51% over 12 months before experiencing a dead-cat bounce. So far it’s dropped 33% from January 22nd. Regardless of the path down that the index follows this time, it still has along way go before the excesses of the current housing bubble are “cleansed.”

The housing market may be melting way more quickly than I expected. Existing home sales for September showed that sales dropped 3.4% from August on a SAAR basis (seasonally adjusted annualized rate) and 4.1% year-over-year. Sales dropped to a 3-year low. August’s original report was revised lower. It was the 7th straight month of year-over-year monthly declines. The 5.15 million SAAR missed Wall Street’s estimate by a country mile. It’s always amusing to read NAR chief “economist” Larry Yun’s sales-spin on the bad numbers, if you have the time.

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