David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, yesterday made the following observation: “To be sure, the Case-Shiller index has yet to roll over. But it has slowed, and being a three-month average, it may take time to show deflation again. The LoanPerformance home price index is down for four months running. Freddie Mac’s conventional home price index fell 0.7% in Q4. RadarLogic’s 25-city house price index is down for two months in a row and in four of the past five.”

A useful source for some guidance on the prospects of real estate is Robert Cambell’s Campbell Real Estate Timing Letter (via Dow Theory Letters) from which I have excerpted the paragraphs below.

“Now is not the time to jump into the real estate market because some analysts are telling you we’ve hit a bottom. NOT only are my timing models telling us that the market hasn’t turned yet, but if the Fed stops buying mortgages via its quantitative easing at the end of the month, and if the government allows its tax credits to expire as planned in June, chances are good that we’ll see lower housing prices through the rest of this year – not higher prices.

“Lifting caps on Fannie and Freddie: Do you wonder why? On December 24, 2009 – in a kind of Christmas Eve surprise – the Treasury decided to lift the caps on how much bailout money the failed mortgage giants, Fannie Mae and Freddie Mack could receive in order to stay in business. The previous caps were $400 billion for both companies. Not anymore. Now the US taxpayers are back on the hook for unlimited financial support to keep Fannie and Freddie functioning – which could amount to as much as $8 trillion in taxpayer liability.

“Why did the Treasury do this? Because today, the FHA, Fannie and Freddie government agencies fund 90% of all U.S. mortgages and guarantee 97% of them. And in January, Fannie and Freddie reported combined losses of $94 billion for 2009. In other words, if Fannie and Freddie can’t keep providing hundreds of billions of dollars worth of mortgage financing, the real estate market will likely collapse.

“Mortgage delinquencies are still sharply rising – which is why these ailing mortgage giants require an extended bailout of more capital to cover anticipated future losses and stay afloat. At Freddie, 4.03% of its single family mortgages were at least 90 days past due at the end of January 2010, up from 1.98% in January 2009. Fannie is even worse: 5.38% were 90 days past due in December 2009, up 2.42% in December 2008.”

This is decidedly bearish commentary and leaves me wondering whether the SPDR S&P Homebuilders ETF – ticking all the boxes of a cyclical bull market – is getting it wrong. Then again, the same question can be asked about the US stock market.


Source: StockCharts.com

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