Housing Looks to Settle

Some contrasting data reached the market today concerning home prices, but it's hard not to notice that home sales appear to be bottoming.

(Stocks in this article: NYSE: FNM, NYSE: FRE, AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, AMEX: QLD, AMEX: SDS, AMEX: DOG)

The State of Housing

A wave of data and news reached the wire today concerning the state of the housing industry. First and foremost, Existing Home Sales for the month of March were reported modestly below economists' expectations, and off February levels.

Existing home sales ran at an annual pace of 4.93 million in March, down from 5.03 mln. in February and short of economists expectation for 4.95 million. According to the National Association of Realtors, sales were 19% off last year's pace. Despite the slight miss, weak housing results are well accepted now by the market and so this report likely plays no role today in market activity.

The NAR also noted that the national median price of a home fell 7.7% from March 2007. Total existing home inventory increased to 9.9 months, versus a 9.6 month supply in February (based on sales pace).

Meanwhile, OFHEO reported that prices for homes mortgaged through Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) rose 0.6% in February, while declining 2.4% for the trailing 12-month period ending in February. OFHEO representatives were surprised, but perhaps lower income homes fall less because they have less distance to fall, and perhaps they rise now spurred by expanded government incentives.

Nonetheless, we agree with an economist at the National Association of Realtors, that the Fed has to now consider showing reserve regarding interest rates. Any further cuts of the fed funds rate could fuel inflation and have a detrimental impact to mortgage rates and the housing market.

William Wheaton, a professor at MIT, has the right idea. The federal government has started to go overboard, taking on what could become faulty collateral and bad loans, and placing an end result greater burden on taxpayers. Wheaton's proposal seems capable of adjusting home prices without raising home inventory; he proposes allowing companies to buy homes on foreclosure with a plan to rent those same homes to current owners at market rental rates.

A general consensus exists that home prices are still greatly inflated and should adjust downward to intrinsic value for orderly and sustainable economic recovery. We agree on this one, and our favorite Democrat (remember The Greek is an Independent now, reformed Republican) Senator Dodd looks wrong with his joint plan (with Barney Frank) to prevent foreclosures by burdening the government and thus taxpayers further.

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