Is today's good news on home prices only a false dawn?

02/23/2010 1:43 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

So how stable is this stability in home prices?

That’s the question raised by the good news on home prices from today’s (February 23) release of the most recent S&P/Case-Shiller index of home prices. On a seasonally adjusted basis the index climbed 0.3% in December from November. For the fourth quarter the index climbed a seasonally adjusted 0.3% from the third quarter.

On a year to year basis the index was down 3.1% from December 2008. But that’s still good news: It’s the smallest year to year drop since May 2007.

Enjoy the good news while it lasts because most housing experts expect to see home prices fall again in 2010. And home builders, which have recently shown signs of recovery, are warning of tougher times ahead. D.R.Horton (DHI), which reported its first quarterly profit since 2007 in the fourth quarter of 2009, told investors in a February 2 conference call that it sees the September quarter ahead as its most challenging because the government tax credit for buying new homes that juiced sales in 2009 is now set to expire in April.

An even bigger problem than the expiration of tax credits is a wave of foreclosures expected in 2010.

A record 3 million homes will be repossessed by lenders this year, according to RealtyTrac. There were 2.8 million foreclosures in 2009.

Delinquencies are still rising even among home owners with good jobs and good credit. Delinquencies in January on jumbo mortgages rose to 9.6%, according to Fitch Ratings.

The rising tide of delinquencies—many of which eventually turn into foreclosures—closely tracks negative homeowner equity, Fitch Ratings reports. A home owner has negative equity when his or her mortgage is bigger than the current shrunken market value of the house. Home owners that have no equity in their homes—that is where the size of the mortgage is equal to or bigger than the value of the house—have a delinquency rate of 40%, according to Fitch Ratings. That’s double the delinquency rate for home owners who have some equity, any equity, in their homes.

Projections for home prices in 2010 range from a minor further decline of 1.5% to a devastating further 10% decline.

Which end of the scale is a more accurate read on 2010 depends on how fast the economy adds jobs (not looking good), how fast the Federal Reserve increases interest rates (not very fast if at all in 2010), and how long the Federal Reserve and the U.S. government keep buying mortgage-backed securities and funding new mortgages (gooood question.)

 Private purchasers of mortgage-backed securities are still pretty much out of the game. Which leaves the Federal Reserve and taxpayer owned Freddie Mac (FRE) and Fannie Mae (FNM) the only game in town. (Without someone to buy packages of mortgages from the banks and other originating mortgage lenders, mortgage lenders would fairly quickly run out of cash.)

The Fed has said that it wants out of this business. Balance sheets at Freddie and Fannie look awfully stretched.

In other words it looks like we’ll have the home mortgage crisis with us for a while yet.

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