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The U.S. Department of Housing and Urban Development issued some sobering news on the housing front recently, namely a report showing that sales of new homes plunged to a record low on an annualized basis in May. All told, such sales tumbled from a downwardly revised 446,000 annual units in April, to just 300,000 units in May. Worse still, the May, 2010 tally was off considerably from the 367,000 unit total in May of 2009, which, admittedly, was near the apparent trough in the housing cycle. A sharp drop in such sales had been widely forecast, but the extent of the plunge was a surprise, and clearly struck a nerve among investors already nervous about the sustainability of the nascent economic upturn in this country. The median price of a new home also declined, tumbling nearly 10%.
 
This dispiriting report was partly a function of the recent expiration of the $8,000 homebuyers tax credit, a purchase-inducement, which concluded on April 30th. This dour report followed by a day a release showing a much more modest decline in sales of existing residences in May. Our sense is that the homebuyer credit was more of an inducement to buyers of new homes, as such purchasers tend to be younger, less-well-established, and purchasers of less-costly homes.
 
To be sure, the housing situation, albeit not upbeat by any means, is not as bleak as this report suggests. In fact, we still think that the low point in the cycle was reached last year. Indeed, the old sports analogy, which maintains that a team on a hot streak is never as good as it looks when it is winning, while a team on an extended losing streak is never as bad as its seems during that losing streak probably applies here. The absence of the tax credit, an inducement that may yet be brought back if the tide does not turn soon, undoubtedly exaggerated the weakness, just as its presence earlier in 2010 had likely masked previous weakness.
 
That said, this report, coming on the heels of the existing home sales decline, and the weakness shown recently in housing starts and building permits cannot be dismissed as a technical or very short-term blip. The housing situation is still troubled and will not turn around overnight, no matter what the policymakers in Washington opt to do.
 
This latest economic setback, meanwhile, did not sit well with investors, who sent an already weak stock market lower in the moments following the report's release. Interestingly, the principal homebuilders, such as D.R. Horton (DHI), KB Home (KBH), Lennar Corp. (LEN), M.D.C. Holdings (MDC), and Toll Brothers (TOL) did not see their stocks weaken materially on this news. However, those equities had already sold off in recent weeks, on the dour housing expectations, so this report was largely in the stock prices of these builder.