Insights 
VT 
US Existing Home Sales Insights
Closings in June are based on a 30-year fixed mortgage rate of 6.77%. Homes average 27 days on the market, up from 22 days previously. First-time buyers make up 30% of the sales, below the historical average of 40%, while 29% of sales are all-cash transactions.
One economist noted that years of undersupply contribute to the record high home price. Additionally, home construction is lagging behind population growth, impacting first-time buyers’ entry into the market. More supply is necessary to increase first-time buyer participation in future years.
Based on the reported decline in home sales, we see an opportunity for bearish plays on housing-related equities. The drop in transactions directly impacts the revenue of homebuilders and real estate services companies. Therefore, we are considering buying put options on ETFs like the SPDR S&P Homebuilders ETF (XHB) to capitalize on potential further downside.
Home Builders Sentiment
This view is strengthened by recent data from the National Association of Home Builders, whose sentiment index fell to 43 in June 2024, marking the second consecutive month below the break-even level of 50. This indicates that builders themselves are pessimistic about the market, corroborating the sales weakness highlighted in the report. This lack of confidence from within the industry supports our negative outlook.
The slowdown noted by Michalowski is also reflected in commodity markets, providing another angle for traders. Lumber futures, a key indicator of construction demand, are trading near $460 per thousand board feet, down more than 60% from their 2022 highs. We interpret this as a strong signal of weakening demand for new builds, which aligns with the concerns raised by Yun.
The persistent undersupply is creating a unique tension, pushing prices to record highs while simultaneously stifling sales volume. This conflict between high prices and low activity increases market uncertainty and the potential for volatility. This environment suggests that option strategies like straddles on the iShares U.S. Home Construction ETF (ITB) could be effective, as they profit from a large price move in either direction.
Furthermore, the housing market’s poor performance could influence the Federal Reserve’s monetary policy. Historically, significant weakness in housing has often preceded a more dovish stance on interest rates. We will be closely monitoring derivatives tied to federal funds futures, as sustained housing trouble might increase the probability of future rate cuts.
