Why Home Depot is Up But Toll Brothers Down on Today's Ugly Housing Numbers

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) was just a hair above breakeven at 1 p.m. EDT. That small gain is impressive, though, in light of the abysmal numbers released today on U.S. new home sales.

The Census Bureau said 406,000 new homes were sold in June on a seasonally adjusted annual rate, a 19% decline from the originally reported number of sales in May.  That result missed economist expectations by over 11%.

However, the May number was a bit too optimistic. The Census Bureau revised the the figure down to 442,000 homes sold from the originally estimated 504,000. 

This report -- which by all accounts was at best very disappointing -- stands in stark contrast to the National Association of Realtors' estimate this week of nearly 3% growth in existing home sales in June. That result was the best since October of last year.

Breaking down the significance

US Existing Home Sales Chart

US Existing Home Sales data by YCharts.

The primary difference between the new homes sales and existing home sales numbers is volume. Over 5 million existing homes were sold in June, according to the National Association of Realtors. That's over 10 times more than the number of new homes sold. 

There are other differences, of course: Existing homes oftentimes have more desirable locations, character, or other features that take time to develop. Buyers can see value in buying an older home that can come at a discount compared to new construction. 

These difference show up in the market reaction to these reports. Dow component Home Depot (NYSE: HD  ) , for example, rose this morning on the news by a modest 0.22%. Why? Because the company relies significantly on the U.S. consumer who buys products for home improvement, landscaping, or general maintenance. The company may be dependent on the housing market, just not so much on the new housing market.

That stands in contrast to companies such as Toll Brothers (NYSE: TOL  ) . Like Home Depot, Toll Brothers relies on the housing market to for its business, but in a totally different way. Toll Brothers builds new homes speculatively, hoping that someone will buy that new construction instead of an existing home elsewhere. 

For Toll Brothers, the market doesn't significantly care that existing home sales topped 5 million units sold last month. The market, though, really cares that the new construction market suddenly looks weak heading out of the summer and into the fall. That's a problem for a builder's second half of the year. And that's why Toll Brothers' stock was down over 4% in early afternoon. 

HD Price Chart

HD Price data by YCharts.

The devil is in the details
The housing market is complex. Location doesn't just mean city or state. It means neighborhoods, school districts, convenience to shopping, and everything else. The cliched "just over the railroad tracks" is true -- moving a short 100 feet down the road could completely change the dynamics of that localized market.

Similarly, for companies that rely on the housing market, these data releases are not one size fits all. The nuance of each business dictates the significance of each report. That's why Home Depot is up today while Toll Brothers is way down.

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8/27/2015 4:35 PM
^DJI $16654.77 Up +369.26 +2.27%
HD $117.66 Up +1.73 +1.49%
Home Depot CAPS Rating: ****
TOL $36.92 Up +0.94 +2.61%
Toll Brothers, Inc… CAPS Rating: ***