Home Prices Going to 2003 Levels?

Can new house prices be getting to the level they were in December 2003? It’s quite possible, according to the recent action in the popular Dow Jones Industrial Construction Index.

My readers know I believe the stock market is a leading indicator of things to come. The action of the market, I believe, often tells us what’s going to happen six to 12 months down the road.

The DJ Home Construction Index is an average monitoring the price action of the 37 largest new home builders in the United States. You might notice some names of the stocks in that index: Beazer, Centex, Lennar, Pulte, Ryland, Toll, and WCI among others.

After hitting a high of 1,115.35 in the summer of 2005, the DJ Home Construction Index fell this past Friday to a new 2006 low of 574.42–the index is down 48% since last summer. More importantly, the DJ Home Construction Index is trading at the same level as it did in December of 2003.

The price action of this widely followed index is telling us a huge slowdown in housing is headed our way. While my contemporaries will argue the negative reaction of investors to housing stocks has been overdone, I’m going with the simple story the price of U.S. new-home stocks is telling us.

My own research of the U.S. housing market, new and used, coupled with what my contacts in the industry are reporting, point to a huge slowdown in the works. There are more used home sales on the market than at any other time in recent years, the inventory of new homes is at a record high, and the time it is taking to sell homes gets longer each passing month.

This slowdown will eventually lead to lower prices ahead. That will be very bad news for those home buyers who purchased homes in the past couple of years with very little equity and with AJR mortgages. The economy will no doubt weaken with the housing and construction market.