In June, new single-family home inventory in the U.S. rose to 9.8 months. This is the highest level since October 2007. In the past, such high inventory levels have often signaled a recession about five out of six times. When supply exceeds six months, it’s usually a sign of a buyer’s market, prompting builders to lower prices. New home sales in June grew by 0.6%, but this was below expectations and marked a 6.6% decrease compared to last year. The median price of new homes dropped by 2.9% to $401,800, suggesting that builders are discounting prices to attract buyers.

Housing Market Decline

Existing-home sales also decreased in June, indicating a slowing housing market. Rising mortgage rates near 7% and economic uncertainty are keeping many potential buyers from purchasing homes, leading to high inventory levels. Given the unusual nature of current new home supply levels, we believe this presents a good opportunity for traders to prepare for a decline in the housing market and a broader economic slowdown. We are taking bearish positions on homebuilder stocks by buying put options on the SPDR S&P Homebuilders ETF (XHB). This aligns with reports from the National Association of Realtors, showing existing-home sales fell for the fifth straight month in June, confirming the downward trend. Historical data suggests that similar supply levels have often preceded recessions. Therefore, we plan to hedge against broader market volatility by purchasing long-dated call options on the CBOE Volatility Index (VIX), which is currently low at around 15. In the 2008 housing-led recession, the VIX soared above 80, indicating that current options are priced favorably compared to potential risks ahead.

Building Defensive Positions

This data may indicate a move toward safe investments, leading us to invest in defensive sectors. We are buying call options on consumer staples (XLP) and utilities (XLU) ETFs, as these sectors usually do better during economic downturns. This is supported by the latest Consumer Price Index data, which shows that inflation remains persistent, continuing to impact household budgets and spending. The fall in median home prices signals that builder profit margins are under pressure, a trend we expect to worsen. Recent earnings reports from major builders highlight increased sales incentives and higher cancellation rates, supporting our bearish outlook. This weakness in a crucial economic sector reinforces a defensive strategy for our entire portfolio. Create your live VT Markets account and start trading now.

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