You can almost peg the awful performance of KB Home (NYSE:KBH) without even reading the recent earnings release. Instead, you need only take a look at the government's latest new home sales figures (PDF here). KB, which wrote off some $800 million from its books, owned up to the obvious. Things aren't getting any better. And they're going to get worse first.

Here's the headline from today's Census Bureau numbers: "New Home Sales Drop 21.2% (+/- 9%) for the month of August, 2007." Forget the seasonality-biased 8.3% drop the others are reporting, especially because that number comes with a margin of error of +/- 12.4%. (In other words, the monthly change could have been positive, or it could also have been a plus-20% massacre.)

Median prices are proving to be weak as well, dropping 8% from last year's August. That's no surprise. In its recent earnings report, Lennar (NYSE:LEN) talked about its woes with price reductions, and this week, D.R. Horton (NYSE:DHI) is making headlines with a San Diego auction, usurping Hovnanian Enterprises (NYSE:HOV) -- which recently cut 20%-25% off some homes, nationwide -- for the coveted role as desperate-looking homebuilder of the week.

With existing home-sales prices falling at a fast and accelerating pace, and a ton of inventory still on the market (8.2 months' worth of new homes, and 10 months worth of used homes), things are primed to get worse for quite a while. Factor in upcoming foreclosures and ARM-reset sales, and you'll know why I believe a flood of supply is going to drown some of the weakest in this business.