In June, the inventory of new single-family homes in the U.S. reached 9.8 months, the highest since October 2007. Such high levels have preceded recessions five out of six recorded instances. A supply over six months usually signals a buyer’s market, pressuring builders to lower prices to clear inventory.
Sales of new homes in June rose by 0.6% but fell short of expectations, also marking a 6.6% decrease compared to the previous year. The median new home price decreased by 2.9% to $401,800, indicating builders are offering discounts to attract buyers.
Housing Market Decline
Existing-home sales also saw a decline in June, reflecting a slowing housing market. The current environment of rising mortgage rates near 7% and economic uncertainty is keeping potential buyers from purchasing, maintaining the elevated inventory levels.
Given the rare signal from new home supply levels, we believe traders should view this as a prime opportunity to position for a housing market decline and broader economic softening. We are establishing bearish positions on homebuilder stocks through the purchase of put options on the SPDR S&P Homebuilders ETF (XHB). This move is supported by recent reports from the National Association of Realtors showing existing-home sales fell for a fifth consecutive month in June, confirming the weakening momentum.
The historical precedent of such supply levels preceding a recession informs our strategy to hedge against wider market volatility. We are purchasing long-dated call options on the CBOE Volatility Index (VIX), which currently hovers near a relatively low 15. During the 2008 housing-led recession, the VIX surged above 80, suggesting that current options are cheaply priced relative to the potential risk ahead.
Building Defensive Positions
This data also signals a probable flight to safety, prompting us to build positions in defensive sectors. We are buying call options on consumer staples (XLP) and utilities (XLU) ETFs, as these sectors tend to outperform during economic contractions. This is reinforced by the latest Consumer Price Index data, which, while moderating, still shows persistent inflation that will continue to pressure household budgets and discretionary spending.
The drop in median home prices indicates that builder margins are under threat, a trend we expect to accelerate. Recent earnings reports from major builders have already noted an increase in sales incentives and higher cancellation rates, justifying our bearish stance. This specific weakness in a key economic sector supports a broader defensive posture across our entire portfolio.
