House Prices Still Falling, Says Lehman Brothers

The S&P Case-Shiller June report will contain Q2 home prices for the 10- and 20-city composites as well as a national index. The composite measures are released on a monthly basis, but since the data are calculated using a three-month average, the June index represents the average for Q2.

Home price depreciation likely accelerated on a y-o-y basis but slowed on a q-o-q basis relative to Q1, note the analysts at Lehman Brothers. We expect the national composite to decline 14.5 percent q-o-q annualized, considerably slower than the 26.9 percent decline in Q1. This should translate to a 16.4 percent decline on a y-o-y basis. We expect the 20-city composite to fall 16.3 percent y-o-y or 12.4 percent q-o-q annualized and the 10-city composite to fall 16.5 percent y-o-y or 14.7 percent q-o-q annualized. We advise some caution when interpreting the quarterly pattern since the data are not seasonally adjusted and typically homes are priced higher in the spring. Our forecast for Q2 home prices would bring national prices down 19 percent from the peak in summer 2006 and back to mid-2004 levels. We judge it likely that home prices still have further to fall, likely not finding a bottom until the end of next year. We expect between a 25 percent and 30 percent peak-to-trough decline in national home prices. The Office of Federal Housing Enterprise Oversight (OFHEO) will release its home price measures for Q2. The data are based on homes with conforming mortgages, thereby largely excluding the jumbo and subprime markets. As such, OFHEO home prices have witnessed a much smaller decline than other measures, such as S&P Case-Shiller, National Association of Realtors or Radar Logic. We expect the all-transactions index, which includes data from home sales and appraisals for refinancing, to decline 0.5 percent q-o-q which would turn the y-o-y rate slightly negative. The seasonally adjusted purchase-only index is likely to fall 2.1 percent q-o-q or 5.6 percent y-o-y. In addition to the national aggregates, OFHEO releases home prices at the state and MSA level. We expect new home sales to fall about 2 percent to 520,000 in July. Builders have reported feeble demand with a record low print on the NAHB buyer traffic index. Mortgage rates have increased over the past few months and, according to the latest Federal Reserve Senior Loan Officer Survey, banks have continued to tighten lending standards for virtually all types of mortgages. Home sales have already fallen 62 percent from the peak and are at the lowest level since 1991. In response to weak demand, builders have pared back aggressively, successfully reducing inventory. Inventory of homes for sale have fallen 22 percent from the peak last spring, but are still too high relative to the dismal sales pace. We expect consumer confidence to improve slightly to 55 in August from 51.9 in July. While economic conditions are still bleak, with rising unemployment and falling home values, the drop in energy prices should provide some comfort to consumers. Other more timely measures of consumer confidence, such as the University of Michigan sentiment and IBD/TIPP index, have ticked higher in August. Attention will be on the conference board's measure on labor conditions which should show that jobs are becoming increasingly difficult to find. The statement from the 5 August FOMC meeting gave a balanced assessment of conditions with no indication of the potential future path of policy. Moreover, only one member, Dallas Fed president Fisher, dissented. The FOMC minutes should provide some insight into whether the revisions to the statement and the fewer-than-expected dissents reflect a new-found consensus or an uneasy compromise - and thereby some possible insight into the likely path of policy over the next few quarters. There are two possible ways a consensus may have arisen among the FOMC members in early August. One would involve some of the more hawkish voting members (specifically Philadelphia Fed president Plosser and Minneapolis Fed president Stern) conceding to the majority's more balanced view, in light of both the relative worsening in the growth outlook and the marginal improvement in inflation expectation measures since the June meeting. In this case, we expect that the near-term balanced set of risks is likely to give way to a preference for easing should the labor market worsen more quickly than the committee currently projects (as we forecast), or additional dislocations occur in financial markets. We view this case as most likely. A second possible way a consensus could have arisen would be if the majority shifted in a slightly more hawkish direction, implicitly conceding a bias towards hikes to insure against high headline inflation becoming embedded in expectations. Subsequent recent speeches by several of the more hawkish committee members, however, suggest a general acceptance of the view that inflation should soon peak and then decline, which would eliminate most of the rationale for rate hikes in the near future. Alternatively, neither might budge, and the statement would then be revealed as an uneasy compromise in an extremely uncertain economic environment. This scenario carries with it a greater chance of (multiple) future dissents, but also would mean that the majority view of roughly balanced risks should dominate the next several policy decisions. In our opinion, the majority has no desire to raise rates for the foreseeable future, barring a significant (but unlikely) deterioration of the projected inflation outlook. Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved