TheStreet.com's Jim Cramer says stocks connected to the sector will take it on the chin if the housing index falls further.

A perusal of the charts this weekend shows something surprising: The weakest group out there has been the homebuilders for several weeks now. KB Home (NYSE: KBH) (Cramer's Take), D.R. Horton (NYSE: DHI) (Cramer's Take), Lennar (NYSE: LEN) (Cramer's Take), and Toll Brothers (NYSE: TOL) (Cramer's Take) have simply been a horror show. What's going on here? How can these stocks be so dangerous when mortgage rates have crashed through 5%, the level that every banker I talk to says mortgages jump off the table and refinancings rush to be done.

What's going on? This group's tracking more than just mortgage rates. It's tracking employment and news flow and both are terrible.

The housing market got two pieces of bad news Friday. The first being weaker-than-expected earnings for KB Home (NYSE: KBH) and the second being a less-than-expected rise in new home sales last month.

First, the good news. New home sales did rise last month. In the current economic environment, that by itself is good news. Unfortunately the rise was less than analysts had been expecting to see.

July was a good month for new home sales, which saw an increase of 9.6 percent during the month.

Before we look at the good news, let's cover the bad news first. Even with the jump in sales in July, new home sales are still well below their peak four years ago. In fact, new home sales are 69 percent below their peaks when the housing market was at its best.

We get a second piece of positive news out of the housing industry in as many days today as the Commerce Department announced this morning that new home construction jumped 3.6% in June.

No one is going to put forth the argument that the housing market is all of a sudden in good shape again, but we are starting to see signs that things could be at least leveling off, which is the first step that needs to be made.

We have all been waiting to hear news that the housing market has rebounded, and we got a little indication that things were improving today as homebuilder sentiment rose this month to its highest level since September.

According to the National Association of Home Builders its index of builder confidence jumped two points in July to 17. This is the first time the index has hit 17 since last September.

As the housing market continues to find its footing, one welcome trend for potential home buyers has been falling home prices. The main consequence of the troubled housing market has been a sharp increase in home inventories, and this has led to a massive drop in home prices, and we see news today that home prices are the most affordable that they have been in the past 18 years.

The Housing Opportunity Index tracks home prices, and it reported that during the first three months of this year, 72.5% of homes for sale fell within the affordability range, up from 60% during the last quarter of 2008. This sharp jump is another testament to just how quickly home prices have eroded over the past few months.

Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.

Financial institutions continue to struggle with subprime mortgages, but the homebuilders have their own battle: tight credit and wary buyers. While builders target different markets from entry level to luxury in order to define their niche, when no one's buying, it doesn't matter. Sales aren't happening across the housing spectrum.

According to a recent survey done by Bank of America, real estate agents are all saying the same thing, no matter what part of the country they're showing houses: traffic is lower than expected, and buyers are waiting, thinking the bottom isn't here. There is anecdotal evidence that things are even worse than that.