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Mortgage debt of $5.6 trillion is a bubble legacy and the most obvious source of a renewal of the financial crisis.

By Dirk van Dijk, CFA

In a very positive sign for the economy, new home sales rose by 6.2% in October to a seasonally adjusted annual rate of 430,000. This far exceeded consensus expectations for an annual new home sales rate of just 404,000. While new home sales are just a small fraction of total homes sales -- on Monday, it was reported that Existing Homes Sales were at an annual rate of 6.1 million -- new home sales pack a much bigger punch for the economy.

We are seeing a few numbers that are “headlining” well. For example, the Case-Schiller reported a 9.36% year-over-year decline. But, the declines are on top of declines we have already seen. Of course we all knew there would be a time that would show a slow-down of rapid declines that were occurring - or houses would be worth zero in no time. So, we are glad to see the drop slowing. But…

The fact is that all of the housing numbers will look better for the foreseeable future since last year’s fall was off the charts. Digging deeper into the report also shows that many of the existing home sales are still from distressed properties.

I was looking through the avalanche of economic data, and it struck me how once again Americans are spending well over their income growth. I thought to myself, well part of this are all the programs through which the American government is subsidizing consumption. In fact, we're at the point one of every six dollars of consumption are from the goverment, meaning you only need to "earn" 5/6ths of your spending power. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]

But something else hit me... I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society. While it is hard to keep track of all the stimuli, try to think back to the Bush spring 2008 stimulus. (that was about 37 stimuli ago) That goosed GDP quite well for two quarters. But we now have a quasi permanent stimulus plan that goes on quarter, after quarter, year after year.... and its equivalent to have a permanent Bush level stimulus (using very conservative figures).

Let's look at this from a more analytical eye.

WASH POST --Sales of newly built homes rose to the highest level in more than a year while the supply of these homes dropped to new lows, according to government data released on Wednesday.

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for October showing the first annual increase to new home sales in 47 months clearly indicating that, as with existing home sales, "buyers" rushed to take advantage of the expiring housing tax credit sending sales volume up 5.1% compared to October 2008.

The government tax gimmick has clearly had a significant effect on demand, far more than I had originally anticipated, but the question is, how long can this artificial demand last?

By Dirk van Dijk

Yesterday, the S&P Case-Shiller index was released. The Composite 20 index (C-20), which covers 20 of the largest metropolitan areas in the country rose by 0.27% on a seasonally adjusted basis (home prices are seasonal, so the adjusted data is what you should be looking at -- most of the press makes a mistake by focusing on the unadjusted data, thus these figures might vary from what you read elsewhere). That was the fourth straight increase. The Composite 10 (C-10) index, which is a subset of the Composite 20, but which has a longer history, posted a 0.36% increase for the month.

The Case-Shiller Home Price Index has increased yet again. This marks the fifth consecutive monthly increase in house prices in the United States. Prices are now only 11.3% lower in the Composite-10 cities and 9.3% lower in the more comprehensive Composite-20 cities than at this time last year.

However, diffusion is breaking down. When the Case-Shiller index began increasing in July, 14 of 20 markets were showing an increase. This number steadily increased as time wore on. Case-Shiller reported in August that 18 of 20 cities showed price increases. When Case-Shiller reported in September, 18 of 20 cities showed price increases.

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Case-Shiller home price data for September showed home prices rose for the fifth straight month. The 20 city series rising 0.3% from August whilst the 10 city index rose 0.4%. The year over year comparisons continue to improve with the 20 city index down -9.4% from a year ago whilst the 10 city index is down -8.5%. Remember these are the non-seasonally adjusted numbers.

Inventory of single-family homes fell 136,000 units in October, but they remain oversupplied by 913,000 units when compared to the long-run average.

Recent days have seen continued rebounds in housing, corporate profit reports and consumer confidence.

Two reports early this week point to continued progress in residential housing resales. On Monday the National Association of Realtors implied that the home-buyer tax credit will likely sustain the housing market throughout next year. In October, first-time buyers used the tax credit and combined it with record low mortgage rates to push home sales to their highest level in 2 1/2 years. Home sales are now 37 percent above their bottom in January and the seven-month supply of inventory is quite modest. We saw bidding wars break out earlier this year in select areas, but now those competitions are becoming more widespread.

A couple of housing price indices, plus national accounts revisions were released today. Much of the new data is not newsworthy, but I did notice that real nonresidential investment was even lower in Q3 than it was in Q2 -- another indicator that employment is not coming back soon.

I also noticed that the BEA price index for residential structures investment was (marginally) lower for the seventh quarter in a row. Here is a comparison of quarterly Case-Shiller, OFHEO, and BEA (all expressed relative to the PPI for housing construction).