Insights 
VT 
The NAHB housing market index for July stood at 33, matching the estimated forecast and reflecting an increase from the prior month’s 32. A rise in price cuts was recorded, with 38% of builders reducing home prices, the highest level since 2022.
The percentage of builders cutting prices was 37% in June, 34% in May, and 29% in April. The average price reduction has remained at 5% since November 2024. Sales incentives usage remained steady at 62% from June.
Annual Decline In Single Family Starts
There is an expected decline in single-family starts for 2025, accompanied by a 6% year-to-date decrease in building permits. Builder traffic has dropped to its lowest point in over two years, indicating subdued market activity.
Based on the provided data, we see the stable housing index as deceptive, with the real story being the record number of builders cutting prices. The underlying weakness, shown by falling permits and the lowest builder traffic in over two years, suggests a deepening slump. This isn’t a market finding its footing; it’s a market struggling for demand.
We believe the primary driver of this weakness is stubbornly high mortgage rates, which have been hovering just above 7% for the 30-year fixed loan according to recent Federal Home Loan Mortgage Corporation data. This affordability crisis is directly reflected in the report from Mr. Michalowski, forcing builders to offer more incentives. This pattern is historically consistent with periods preceding a Federal Reserve pivot towards easier monetary policy, as seen in previous housing downturns.
Buying Put Options On Homebuilder ETFs
In response, we are looking to buy put options on homebuilder ETFs, such as the iShares U.S. Home Construction ETF (ITB), to capitalize on the expected decline in builder equity prices. Major builders have recently guided for lower future sales and pointed to elevated cancellation rates near 15%, further supporting this bearish stance. The 38% of builders cutting prices is a direct hit to their future profit margins.
Furthermore, this data strengthens the case for a more dovish central bank policy in the coming months. A slowing housing sector, which is a key component of GDP, makes further interest rate hikes untenable and increases the probability of future rate cuts. We are therefore positioning in interest rate derivatives that will profit from a drop in yields, such as receiving fixed on interest rate swaps.
The weakness could also spill over into the broader economy, impacting consumer confidence and the financial sector’s loan portfolios. We see this as an opportunity to purchase protective puts on financial sector ETFs as a hedge against a potential increase in mortgage defaults. This broad economic uncertainty also makes long volatility positions, possibly through options on the VIX index, an attractive strategy for the coming weeks.
