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What's Behind The Sell-Off in Home Builders?

Home builder selloff continues despite low mortgage rates: what's up?

Home builders down 3 to 5 percent today. After rallying yesterday, builders have again resumed their downward trend, down about 13 percent from their highs of the year, which they hit 3 weeks ago.

Today's action is especially disappointing, because the Mortgage Bankers Association (MBA) said applications for mortgages to buy homes were up 13.2 percent last week (refis were up 18.2 percent) as the average 30-year rate fell to 4.89 percent, the lowest rates since late May.

This is great news-but traders are continuing to sell home builders. There are two issues:

1) the "Cash for Clunkers" problem: the Street is expecting that sales will taper off in the fall, partly due to the expiration of the first time home buyer tax credit in November.

2) There is also a vague but persistent worry that the number of homes in the foreclosure pipeline might increase this fall, which would create a spike in the inventory of homes for sale.

These inventory levels, for both new and existing home sales, have been trending downward in the past several months. A spike upward would be a psychological blow to the housing recovery.

Why is the Street worried about a spike in foreclosures? Because there have been both national and state foreclosure moratoriums in effect for months now, and some are set to expire. California's moratorium, for example, expires September 15th.

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