Here's How to Profit from Plummeting Homebuilder Stocks

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Housing is an issue for all of us – as investors and as ordinary people in need of a roof over our heads.

As investors, there's always lots of housing news toward the end of the month.

The National Association of Realtors (NAR) releases its "pending" and "existing" home sales reports, which include sales volume and prices, each month. And the U.S. Department of Commerce releases its New Home Sales report.

I like to keep you updated on those reports here.

The news in late October wasn't good. I have been warning about this for months.

Homebuilding stocks have tanked since I suggested in early October that they were ripe to be shorted. It was an opportunity for big profits.

So should we harvest those profits now?

Here's what you need to know from the latest housing data...

Ignore Outdated and Seasonally Adjusted Sales Data – Pay Attention to These Numbers Instead

The NAR released its existing home sales data on Oct. 19.

It's essentially useless data because it tells us merely how many homes sold in previous months went to closing in September. Closing is a rubber-stamp formality in 90% to 95% of sales. Furthermore, it's old data. The September "sales" were already typically six to eight weeks beyond the contract date. So the Oct. 19 report covers sales made mostly in August.

The real sale is the signing of the sales contract. The NAR calls that data "pending" home sales. But it's the only data that matters because it's when all parties to the sale, including the realtor, buyer, seller, and other buyers in the market, consider the property sold. The SOLD sign goes up, and the house is listed as SOLD in the multiple listing service. It's when the price is set.

So that's what we pay attention to. The NAR reports it. They call it "pending home sales."

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The pending home sales report for contracts signed in September was released on Oct. 25. For real estate, a one-month delay is quick enough – ntil it isn't. And right now, we're getting to the threshold of one of those "until it isn't" moments.

Take October 2005. Sales were rocking that summer. And then they simply dried up. Sale prices remained astronomical, but there were few sales. Any seller who found a buyer was essentially a lottery winner after October 2005. The market had dried up.

Now we know that housing sales have been softening recently. I've been reporting it here for the past few months. Even the media has recognized it. But here's what's funny: Today, they're reporting, Whoop de doo! Sales were up in September! All major media outlets dutifully reported a 0.5% increase in the seasonally adjusted number.

But you and I are not consumers of the seasonally adjusted hocus pocus. We like to know what really happened. So we look at the actual, unmanipulated sales numbers. We compare them on the basis of monthly and year-to-year change. That tells us what's really going on, and it's even easier to see on a chart.