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It was reported today that the January Case-Shiller home price index rose +0.3% month-to-month (8th consecutive month of improvement), and declined only -0.7% year-over-year from -3.1% last month; this is the slowest rate of decline in 36 months.

January saw month-to-month price declines in the following cities: Miami (-0.1%), Atlanta (-0.5%), Chicago (-0.8%), Charlotte (-0.1%), New York (-0.3%), Portland (-0.5%), Dallas (-0.3%) and Seattle (-0.6%).   In contrast prices improved in Los Angeles (+1.8%), San Diego (+0.9%), San Francisco (+0.6%), and Phoenix (+0.8%).

We do not expect this trend to continue as we head into 2H10.  Despite continued efforts on the part of the Obama administration to provide relief to the housing sector, there are several reasons for a more cautious stance.  (1) Interest rates (especially mortgage rates) are headed higher, (2) housing starts and existing home sales continue to be at extremely low levels, (3) there is a recent uptick in the percentage of existing home sales sold in foreclosure and (4) home prices will remain depressed as the rate of foreclosed homes increases (adding to inventory of unsold homes).

As a point of reference, the S&P 500 Homebuilding index is up 24% in the past three months and 4.5% over the past week.  Over the same time period, the S&P 500 is up 4.2% and 0.6%, respectively.   

In the short run, home builders can protect their earnings stream against a stagnating housing market by (1) focusing on selling homes where there are less distressed properties, (2) cutting administrative costs and (3) reducing incentives to buyers.  The disconnect between the housing market and homebuilding stocks is what we call a duration mismatch.

Howard Penney

Managing Director