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A Peak Point - June 16 2010

A Peak Point - June 16 2010

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Peak Theories Research LLC 
is an on-line research firm dedicated to providing investors with a macro long-term view onthe financial markets and the economy.
Please see important disclosure statements at the end of this document.
June 16, 2010
 Abigail F. Doolittleabigail@peaktheories.com518-391-9313
 
www.peaktheories.com
Pointed Commentary on the Primary Financial Market Trend
 A Peak Point
The Bet’s Still On
Back in February, I wrote about a $2 bet I’ve had with a colleague since last spring on the state of the housing market. My side:residential housing had further to fall. His side: the worst was behind us.We spoke the other day and I told him to start saving:
the housing market is about to take another tumble
.
Pricing
The highly esteemed
S&P/Case-Shiller
National Price Index
fell 3.2%
in Q1:10 from Q4:09 for the second quarterly decline in a row,perhaps a
near-term inflection point
worth noting, and it remains
31% below
its
peak
in
Q2:06
. To the positive, the index did show a2% improvement on a year-over-year basis.As is always the case, the chart shows us the story and, in this case, it is not a very good story.
Source: Standard & Poor’s and Fiserv
The official comments to accompany the May 25 release were subdued at best.“The housing market may be in better shape than this time last year; but, when you look at recent trends there are
signs of somerenewed weakening in home prices
 
,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Now that the taxincentive ended on April 30th, we don’t expect to see a boost in relative demand.”In addition,
data
out of the
Federal Housing Finance Agency (FHFA)
and
Zillow.com
 
support
the
March CSI data
. Specifically, theFHFA’s seasonally-adjusted purchase only index declined 1.9% in Q1:10 from Q4:09 while also showing a 3% decline year-over-yearwhile the Zillow Home Value Index showed that home prices were down 1% and 3.8% on a quarterly and year-over-year basis,respectively.Overall,
recent pricing trends
point to
weakness
in the
housing market
and this is troubling given that those trends reflect thegovernment’s stimulus programs. What will happen without that price propping?
 
PeakTheoriesResearch
LLC
 
Peak Theories Research LLC 
is an on-line research firm dedicated to providing investors with a macro long-term view onthe financial markets and the economy.
Please see important disclosure statements at the end of this document.
June 16, 2010
 A Peak Point 
www.peaktheories.com
Foreclosures
Last week, RealtyTrac reported that overall foreclosure activity surpassed 300k for the 15
th
straight month. While defaults and auctionswere down,
bank repossessions
hit a record
monthly high
for the
second month in a row in May
with a total of 93,777 U.S. propertiesrepossessed by lenders during the month. This represents an increase of 1% from April and an
increase
of 
44%
from May 2009.
We’re nowhere near out of the woods
 
,” Rick Sharga, RealtyTrac’s senior vice president for marketing, told Bloomberg. “We’re likelyto set a quarterly record for home seizures if June is anything like May.”Sharga recently predicted that
another 5 million delinquent mortgages will end in foreclosure
in addition to the 3.1 million propertiesthat have been seized by banks already.
The second quarter won’t be the peak
 
,” Sharga said. “
I’m not even sure 2010 will be
.”At the very least,
foreclosure activity
will keep a cap on home prices but could act as a
downward pressure on home prices
as cheaphomes hit the market with banks eager to unload the merchandise.
Existing Home Inventory
For the third consecutive month,
existing home inventory
increased in
April
by
11.5%
for the highest level of inventory on the marketsince July 2009. This represents the first annual increase in inventory levels since July 2008 after recording many months of year-over-year declines.One can certainly argue that April’s inventory increase reflects the surge of sellers who rushed to list their homes before the expirationof the federal homebuyer tax credit, but irrespective of its cause, it is a
potentially negative trend for housing
.
Housing Starts and New Homes
We’ll have an update on this figure today, but this annual chart is highly unusual. After having put in a
multi-decade bottom
of sorts,
support has been broken
. In fact, the
long-term trend
is clearly
down
.
Source: U.S. Census Bureau
In addition, it appears that homebuilders are less confident about their prospects with the expiration of the tax credit based on June’sdecline in the National Association of Home Builders Index to 17 from 22, sinking five points after two straight months of gains.
 
PeakTheoriesResearch
LLC
 
Peak Theories Research LLC 
is an on-line research firm dedicated to providing investors with a macro long-term view onthe financial markets and the economy.
Please see important disclosure statements at the end of this document.
June 16, 2010
 A Peak Point 
www.peaktheories.com
Current Activity
In an attempt to piece together what residential housing activity may look like without the effect of the government’s MBS purchaseprogram or its tax credit buying incentives, I have collected an assortment of possible indicators.
 
For the fifth straight week in a row,
U.S. home buying applications dropped by 5.7%
to the
lowest level since February 1997
,according to the Mortgage Bankers Association, while the MBA refinance index fell 14.3%, driving total mortgage applicationsdown 12.2% for the week of June 4. This may be the key figure to watch for the next several weeks since it does not reflect thegovernment’s intervention.
 
NAR’s Pending Home Sales Index, a forward-looking indicator, rose 6% based on contracts signed in April, following gains of 7.1%and 8.3% in March and February, respectively. While these figures do reflect the government’s intervention, the
declining trendmay point
to a
coming cool-off 
.
 
Building Permits
 
, another forward-looking indicator,
fell in April by the most since December 2008
according to CommerceDepartment figures to 606k and about 11.5% percent below the revised March rate of 685,000. In all fairness and to the positive,April 2010’s figure is 15.9% above the revised April 2009 estimate of 523,000.
 
Trulia.com reported that a
greater number
of 
offering prices
were being
cut
in
May
.
 
Unemployment
Lastly, and perhaps
the biggest danger of all
: the
worst unemployment picture in nearly thirty years
.
 
More than 8 million jobs have been lost since December of 2007. The unemployment rate stands at 9.7% while a broader measureused to include those who have stopped looking for jobs is slightly below 17%.Perhaps one of the frightening statistics is that in May,
46% of the unemployed
had been
without a job
for
more than 6 months
or
 
more than any other time since 1946. If this trend carries forward, it means, essentially, should you lose your job, there is a nearly 50%chance that you will be without a job for at least half a year.It is the fear that accompanies the realty of this statistic that is likely to keep housing market activity subdued.
How many people willlook to buy homes if they are afraid of the job market?
 And, more obviously,
within the millions of jobless
 
, there are and will be many who are
unable to make their mortgage payments
 
,whether adjusted up or fixed, and let their homes go to foreclosure,
depressing housing prices further
.
The Sum of the Parts
Recent trends in pricing, foreclosures, and inventory seem to support the case for a double dip in housing as does the long-term trendin housing starts. A challenging employment picture provides reason to believe that these trends are likely to remain in place andespecially with the removal of the government’s “glue”. All of this leads me to believe that the
last year
was one of 
respite
for the
housing market
and
not recovery
.And
until
the
asset class
at the
center
of the
financial crisis heals
housing
– we can be assured that
the crisis itself is not over
.
 
PeakTheoriesResearch
LLC

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