The NAHB housing market index for July stayed at 33, matching predictions and showing an increase from June’s 32. Notably, more builders are reducing home prices, with 38% cutting prices—the highest since 2022. Here are the monthly figures for builders cutting prices: – June: 37% – May: 34% – April: 29% The average price reduction has stayed at 5% since November 2024. The use of sales incentives has remained constant at 62% since June.

Annual Decline in Single-Family Starts

We expect a decrease in single-family home starts for 2025, along with a 6% drop in building permits so far this year. Builder traffic has fallen to the lowest level in over two years, signaling weak market activity. While the housing index appears stable, it’s misleading. The real issue is the rising number of builders cutting prices. The decline in permits and low builder traffic reveal deeper challenges in the market. This isn’t just a temporary setback—it’s a struggle for demand. High mortgage rates, just above 7% for 30-year fixed loans according to the Federal Home Loan Mortgage Corporation, are a major factor. This affordability crisis is forcing builders to give more incentives. This trend typically occurs before the Federal Reserve shifts to easier monetary policy, as seen in past housing downturns.

Buying Put Options on Homebuilder ETFs

In light of this, we plan to buy put options on homebuilder ETFs like the iShares U.S. Home Construction ETF (ITB) to profit from anticipated declines in builder stock prices. Major builders are now predicting lower future sales and are experiencing high cancellation rates around 15%, which adds to our bearish outlook. The 38% of builders cutting prices will directly impact their future profits. This information also supports the likelihood of the central bank adopting a more dovish policy soon. A slowing housing market, a critical part of GDP, makes further interest rate hikes unlikely and raises the chance of future cuts. We are thus investing in interest rate derivatives that could benefit if yields drop, such as receiving fixed on interest rate swaps. Moreover, this weakness could affect the broader economy, shaking consumer confidence and impacting loan portfolios in the financial sector. We see this as a chance to buy protective puts on financial sector ETFs to guard against possible mortgage defaults. The overall economic uncertainty also makes long volatility strategies, such as options on the VIX index, appealing for the upcoming weeks. Create your live VT Markets account and start trading now.

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