Business & Finance
Business and Finance
Business and Finance
Thu, July 29, 2010
Wed, July 28, 2010 
CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: MGIC (NYSE: [ MTG ]), PMI Group (NYSE: [ PMI ]), Home Depot (NYSE: [ HD ]), Ethan Allen (NYSE: [ ETH ]) and Kroger (NYSE: [ KR ]).
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Here are highlights from Tuesdaya™s Analyst Blog:
Home Prices Rise in May
The Case Schiller Home Price Indexes were generally higher in May.On a seasonally adjusted basis (and there is significant seasonality to home prices, so looking at the unadjusted numbers the way that most of the media does is a serious mistake) both the Composite 20 (C20) and Composite 10 (C10) indexes rose by 0.47% for the month. On a year-over-year basis, the C-20 is up 4.63% and the C10 is up 5.44%.
The problem with the Case Schiller index numbers is that they take a long time to come out, and are actually a three-month average. Very useful for historians, but a little bit lacking in telling about current conditions.
Most of the time that would not matter, but now it is significant since we are talking about the price of existing homes, which are recorded at closing.These numbers are still being affected by the homebuyer tax credit.Any transaction that is subsidized by a third party will see the benefits split between the buyer and the seller.
I suspect that housing prices are going to start to fall again, and as they do, companies across the mortgage complex are going to be hurt again.The mortgage insurers like MGIC (NYSE: [ MTG ]) and PMI Group (NYSE: [ PMI ]) are particularly exposed, but they are not alone.A renewed decline in the price of houses will lead to greater losses at Fannie and Freddie, which means the U.S. government will absorb some of the pain.
There is also the housing wealth effect to consider.If the price of you home goes down, you feel less wealthy, even if you still have substantial equity in your house.As a result you will tend to save more and spend less. Generally, the housing wealth effect is estimated at between $0.05 and $0.07, which is greater than the wealth effect from the stock market (because house prices move more slowly than stock prices, and thus the changes in wealth are more likely to be seen as permanent).
In other words, if your house loses $10,000 in value, on average you will spend between $500 and $700 less in the following year. When that happens to tens of millions of families, it starts to have a real effect on consumer spending, and consumer spending makes up 71% of the economy. A renewed decline in home prices would not just affect the obvious retailers like Home Depot (NYSE: [ HD ]), but the entire spectrum of retailers, with those that specialize in more discretionary items -- for example, a furniture store like Ethan Allen (NYSE: [ ETH ]) -- suffering more than those that focus on staples like supermarkets such as Krogera™s (NYSE: [ KR ]).
Housing was the key reason for the Great Recession happening, and it remains the key reason for the anemic expansion. Todaya™s news is positive in the short term, but the odds are that it will not last.
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