The following is a republished note from our Financials vertical, led by Josh Steiner - the architect behind our long-term Housing Headwinds thesis. Josh has been and continues to remain both the axe and bear on the Street as it relates to the US housing market. If you'd like to see more of his extensive work on this subject, please email sales@hedgeye.com. 


Case-Shiller YoY Decline Worsens

The Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  There is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June, as we show in the chart below. Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.  Let us know if you'd like to see a copy of the S&P report.


Looking at the breadth of the index,16 of the 20 cities measured accelerated their YoY declines in April while 4 slowed or improved.  Month over month, all 20 cities were sequentially better on an NSA basis (declined less or increased more MoM in April than they did in March).


Mortgage Interest Deduction Under Renewed Fire

The head of the Minneapolis Federal Reserve made a speech yesterday proposing that the mortgage interest deduction be scrapped in favor of a tax credit to assist homebuyers with their down payment.  While Kocherlakota was attempting to disincentivize leverage, rather than increase total government tax revenue, the mortgage interest deduction has come under fire from a number of different angles recently.  For reference, with a median home price of $170,000, a 20% down payment, and a 5% mortgage rate, the median borrower's monthly payment is $730.  Annual interest expense on this payment is $6,430 at year 4 (roughly midway through the life of a typical mortgage).  With a $50,000 median household income and an average 22% federal tax rate, the interest deduction is good for a $1,415 tax offset.  Eliminating this would represent a 2.8% tax increase on $50,000 in income, the national household median.  Needless to say, this would be a headwind for the housing market and another push from homeownership into the rental market.  












As we've noted previously, the greatest appreciation/smallest downside each month occurs in those cities with the highest home prices.  The charts below demonstrate. Not surprisingly, Washington DC continues to be the best performing market in the country (followed by New York) based on the unprecedented growth of the Federal Government.






Joshua Steiner, CFA


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