Home prices could fall by another 25%, says Meredith Whitney, but stock market shrugs

The stock market doesn’t hear what it doesn’t want to hear.

On September 10, influential financial sector analyst Meredith Whitney of Meredith Whitney Advisory Group told CNBC that U.S. home prices could fall by yet another 25%.

The stock market barely blinked before continuing its rally. The Standard Poor’s 500 stock index finished the day up almost 11 points to 1044.  The index hasn’t closed at that level since October 2008.

There’s nothing flakey about Whitney’s logic. “No bank underwrote a loan with 10% unemployment on the horizon,” she told CNBC. Read more

Default isn’t just for subprime mortgages anymore

The rate of default among home owners with prime mortgages is soaring. These are supposed to be the safest mortgages, the ones that went only to borrowers with the best credit scores, remember.

And that’s a huge problem for a banking system that was almost brought to its knees when subprime mortgages, those that went to borrowers with the worst credit, defaulted by the truck load.

The dollar volume of prime mortgages in delinquency or default rose 13.8% from March to June, according to a new study by Standard & Poor’s.  The study only covered mortgages originated by banks, bundled into securities, and then sold to investors. It omitted what are called “conforming” mortgages, backed by federal-government-backed Fannie Mae (FNM) or Freddie Mac (FRE).

The study comes as some Wall Street analysts have started to question recent numbers suggesting that the housing market has either bottomed or moved into recovery. The widely followed S&P/Case-Shiller index of housing prices showed a gain in prices in May from April. That was the first month-to-month increase since 2006.  On an annual basis prices declined a seasonally adjusted 2%, leading investors to argue that the housing market was near a bottom.

The problem, though, is that pesky phrase “seasonally adjusted.” Efforts to revise the raw data to reflect normal seasonal swings in home buying activity–most home buying takes place in the spring and summer–led to over-stating the price recovery, analysts at Barclays Capital and Bank of America have argued. A more accurate estimate, Barclays calculated, would be that housing prices declined at an annual 10% to 15% rate.

In other words, this market hasn’t seen bottom yet. Read more