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.

At the time of publication, Seth Jayson, a top-10 Motley Fool CAPS player, had no positions in any company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.