This morning’s Case Shiller housing data confirmed that the double dip is officially here.  This should come as no surprise as real-time trackers of this data have long predicted this.  Case Shiller reports:

“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite  and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2%  over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Since December 2010, we have found an increasing number of markets posting  new lows. In March 2011, 12 cities – Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland (OR) and Tampa – fell to their lowest levels as measured by the current housing cycle. Washington D.C. was the only MSA displaying positive trends with an annual growth rate of +4.3% and a 1.1% increase from its February level.

“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit.  Excluding the results of that policy, there has been  no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.

In April 2010 I described why this scenario was likely to unfold:

“As I said above, the most likely scenario is the “work-out”.   Government stimulus continues to bolster the private sector in the back half of 2010, but the lack of direct aid in housing begins to weigh on the housing market in the second half of 2010.  Negative seasonal trends make for a very difficult H2 in housing and a tough start in 2011.  The economy appears fairly strong into the latter portion of 2010, but the dwindling stimulus ultimately pressures the private sector.  Demand for housing remains tepid as job growth is weak, the unemployment rate remains above 8% into 2011 and the negative inventory trends prove too much for the real estate market to overcome.  Ultimately, prices decline 7%-15% over the course of the coming 2.5 years.”

Prices are down 5%+ year over year so we’re officially into the double dip, however, it’s not over yet.  This alone will have the Fed very concerned.  If you’ll recall, the credit crisis was a housing crisis.  This data should have the Fed on the path to accommodation for the foreseeable future.  The banking system, as a result of this data, is likely to remain very fragile.

S&P estimates that the damage to the banking system from a double dip will amount to at least $70-$80B in losses.  Via S&P & Research recap:

“If a double-dip in housing of the magnitude we’ve imagined were to ensue over the next few quarters, rising foreclosures and delinquencies, combined with a higher volume of home modifications and redefaults, would potentially drive credit losses higher by $30 billion to $35 billion.

This would result in a five-year cumulative credit loss rate of 8.5% to 9% range in banks’ housing portfolios, approximately 0.5 to 1 percentage point higher than in our baseline forecast. Separately, a buildup of representation and warranty expense might increase costs by an estimated $33 billion. Another $6 billion to $12 billion in fee income might be foregone due to fewer originations.

Overall, we estimate that total cumulative loan losses to the U.S. banking sector from these risks could increase by $70 billion to $80 billion relative to a more benign baseline.”

Don’t expect the Fed to change their policy stance any time soon with this housing debacle going on.  And we should all hope they don’t resort to QE3 – it’s now looking like QE2 did less than nothing….



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Dr. Oliver Strebel

    “The banking system, as a result of this data, is likely to remain very fragile.”

    Yes, and the equity market is quite unimpressed by these data (also by Chicago PMI). The trading algos seem to have stabilized their parameters and produce robust -0.3 to +0.7 daily gains and losses as from December 2010 to February 2011 resulting in a almost linear ramp up if viewed in a severeal month chart *grin*.

    How will the algos behave, if the liquidity shower of the Fed will only dropple starting in July? Thats the question (IMHO).

  • John


    You and others are using the emotion-laden phrase “double dip” to describe national housing prices. This phrase is incorrect because there must be a significant recovery counter trend between dips in order for a “double dip” to occur. Eyeballing the US National Price Index shows a very brief increase from about 130 to about 139, which is approximately 7% and is hardly a significant recovery counter trend. Furthermore, as Case-Shiller reports, this tepid bounce “was largely due to the first-time home buyers tax credit” and thus artificially induced. Case-Shiller concludes “there has been no recovery or even stabilization in home prices during or after the recent recession”.

    The data show a resumption of the decline after a temporary mild (and artificially-induced) interruption, not a recovery, and therefore NOT a double-dip.

  • Cullen Roche

    Kind of a semantic point, no? Anyone who has been reading my work for the last 3-5 years has seen me call the housing collapse, small rebound and subsequent decline with pinpoint accuracy. I don’t really care whether it’s a technical double dip or not. The housing market remains depressed. That’s all you really need to know.

  • Oil Trader`s Blog

    Recently I noticed that David Tepper initiated trades in a few homebuilding stocks -while he is probably underwater on those names, I have noticed that Lennar (LEN), Toll Brothers (TOL) and KB Home (KBH) have been quietly rallying over the last few days.

    I am following the group with a particular interest as they have been rallying on bad news.

  • Michael Covel

    I can testify from first hand experience–the DC area still shows real estate up.

  • Hal (GT)

    I don’t know that QE2 did next nothing. One might argue that it created an artificial bubble. Or to change the metaphor, it but the brain dead dollar on life support so that the organs could be harvested.

  • Hal (GT)

    Meant put, not “but”.

  • Cullen Roche

    1 of the only markets in the country holding up decently. And why do we think that is? :-)

  • las vegas tax accountant

    The home-buyer credits only prolonged the correction in housing. Many of those who used the credit (especially in the first round) are now ending up in foreclosure. A high percentage of loan modifications are also ending up in foreclosure. Without government stimulus, the worst would probably be over by now.

  • JWG

    Single family detached homes financed by 30 year loans look like a losing proposition to many in the Facebook-Twitter generation. Commissions, ratcheting property taxes, depreciation, maintenance and upkeep, utilities, insurance, constrained liquidity and a constraint on labor mobility. All that and market risk too. Why bother? Having children to raise is the only reason you would bother these days. The “house as investment” myth is dying.

  • Website Guru

    We’re usually happy when the stuff we buy gets cheaper. If you want to buy a house, falling home prices seems like a good thing