Market Playground

by Dennis “Cos” Costa

As reported today (Tuesday, August 31st) in the Standard & Poor’s (S&P) Case-Shiller Home Price Index, which is a leading measure of U.S. home prices, the U.S. National Home Price Index rose 4.4% in the second quarter of 2010. This represents an increase from the first quarter of 2010, which reported national home prices falling 2.8%. National home prices are up 3.6% in the second quarter on a year-over-year basis. In June, it was reported that 17 of the 20 Metropolitan Statistical Areas (MSA’s) covered by the Case-Shiller Home Price Indices, were up quarter-over-quarter.

It was also reported that the two composite city reports were up sequentially. The two MSA composites consisting of a 10-City Composite and 20-City Composite, which also covers all nine U.S. census divisions, recorded a second quarter improvement of 3.6% over the same period of 2009. These two composite city reports are reported monthly, and have seen 16 months of consecutive improvement as measured in annual rates of return, but June was the first month to moderate from the prior month’s rate of improvement.

With the S&P Case-Shiller Home Price Index report being a lagging economic indicator, investors should be cautious of this number which appears to bring a much needed sign of Housing Market pricing recovery. Just last week, both new home sales and the sales of existing homes in July reported some very weak numbers. Existing home sales posted the lowest sales number in fifteen years, representing a drop in sales from 5,260K units in June 2010 to 3,830K homes sold in July — or a 27% decline. New homes sold in July were also down significantly from June of 2010, posting a decline of 12.4% with just 276K units sold as compared to 315K sold in June. This caution was echoed by S&P in the discussion this morning,

“The monthly composites cover June, and the national index covers the second quarter, when the government’s program for first time home-buyers was winding down. While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead. Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year.”

–David M. Blitzer, Charmain of the Index Committee at S&P

The 10-City and 20-City Composites recorded annual rates of returns of 5.0% and 4.2% respectively in June, but that was versus a 10-City annual rate of 5.4% in May 2010, and a 20-City annual rate of 4.6%. These numbers at the end of the second quarter do not bode well for pricing moving forward.

Without the Government’s first time home-buyer credit program, it is apparent that the pricing for new homes rate of annual return decelerated, and was supported with the July existing home and new home data reported last week. The concern for investors here is to monitor how last weeks reports, showing the seasonally adjusted annual rate of sales decreasing for both these housing types, will effect pricing. As the rate of sales in both new and existing homes decelerate, inventories representing supply grow as measured by months-to-turn, putting pressure again on prices. The obvious conclusion is that prices of homes sold will continue to decline, to stimulate sales without government incentives, leaving government stimulus and its value up for debate again heading into the mid-term elections in November.

In spite of this analysis, and reports of a still weak housing market impacting all those companies associated with the industry as was the case last week, the SPDR Series Trust Home Builder Index was up 1.27% or $.18 cents on the news. The index has been moving contrary to all of the lagging reports, with hopes that the worst may be over for these home building and supporting services companies. Lennar Corporation’s Class A Comm (NYSE: LEN) was up $.22 cents or 1.68%, and Williams-Sonoma, Inc. (NYSE: WSM) was up $.46 cents or 1.65% in early trading.

Position: None in any security mentioned

Contact the Author: denniscosta@marketplayground.com