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Analyzing the S&P Case-Shiller Numbers

The S&P Case-Shiller home price numbers for November showed a 0.2% month to month decline (+2.0% seasonally adjusted), representing a 5.4% decrease year over year. The month to month decline broke a six-month winning streak for the index, although it was only a mild decrease. Actually, we were surprised to see prices increase so smoothly in previous months. There are still significant foreclosure issues behind housing, and in the months ahead we are expecting to see some volatility in pricing.

Regionally, the numbers have been a little concerning. Over the past couple of months, the increasing regions have generally been the hardest hit markets (the biggest month to month gain was 1.1% in Phoenix) such as California, while prices have been declining throughout the rest of the country. It seems likely that the cocktails of government aid that are going into these difficult markets may be propping up values for the time being, and taking them up from extremely depressed levels. Meanwhile, the "healthy" markets are on a slow decline. The biggest monthly drop was a 1.1% decline in Chicago. It is apparent after recent home sales data that without the tax credit in place (it had been set to expire in November, causing a drop in demand), home sales will fall. Consequentially, removal of the tax credit would lower the floor in prices. For now, the tax credit is a necessary safety net.

Jobs are still being lost nationwide, which is the biggest driver of foreclosures. In addition, the White House's HAMP mortgage program currently has more than 850,000 people enrolled in a trial, of which less than 70,000 have been converted to the full program. We are afraid that a large amount of these trial participants that do not qualify for a modification are likely to enter the delinquency process. However, the said decline in employment is showing signs of abating and by the middle of the next year we could well be seeing job growth. This would help greatly to stall foreclosures, while also reigniting natural home demand (sans tax credit, mortgage liquidity, and other aid). When employment does eventually turn, then we would expect to see supply and demand come back into balance, allowing prices to begin making significant progress to the upside.

Like it or not, if the government wasn't so involved in housing, the market would have continued to fall much further, and still could if these measures were taken out. The tax credit appears to have a meaningful psychological affect on buyers, maintaining demand. Meanwhile, the HAMP program, as inefficient as it may be, is likely to cause enough of a delay effect on foreclosures to carry the market to that point of employment growth when the market can begin to recover more naturally. Prices will rise then, but the big question will be how the Administration winds down those programs, if it does. In addition, there are likely to be big structural changes in Fannie Mae, Freddie Mac, and the financial industry as a whole.

What we need to acknowledge is that the government is essentially re-inflating the housing bubble to keep it from crashing further, and it will be an incredibly difficult balancing act to ensure that the housing market recovers to actual growth before taking out these backstops, but then to also wind down the programs once we are on our way to avoid artificially supercharging the market. I believe this can be done, but I have my concerns, particularly with respect to Fannie and Freddie. Barney Frank has already acknowledged that they need to be restructured, and I think just about anybody would agree with that. However, I would bet my bottom dollar that Fannie and Freddie get fully integrated into the government as opposed to broken up. A fully Fed-backed Fannie and Freddie with the government at the controls is an extremely powerful bubble machine.

Written by David Urani a Research Analyst for Wall Street Strategies ( specializing in the homebuilding, staffing, medical devices, and logistical services industries.


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