All of the major business sites are reporting that home prices are down 15.8% from a year ago according to Case-Schiller data. Marketwatch says:

"Prices in 10 cities fell 16.9% in the past year. Prices thus are at the same levels as they were in the summer of 2004, which means four years of appreciation have been effectively wiped out. Prices are down 18.4% from peak levels seen two years ago."

The WSJ added:

"On a month-to month basis, the 10-market survey declined 1% in May and the 20-market survey dropped by 0.9% Not all the data were negative. Of the 20 markets tracked, house prices rose in seven in May from April. But many economists said the housing market has yet to bottom out nationally because home supply still outstrips demand."

And Fortune says:

"The 20-city index's Sun Belt cities, which recorded the biggest price gains during the boom, have led the charge down. Las Vegas prices have plummeted 28.4% during the past 12 months; Miami prices fell 28.3%; and Phoenix homes lost 26.5% of their value.

Midwest metro areas, which have endured tough economic times for years, are also feeling the pain. Detroit prices are off 17.4% for the 12 months, and Cleveland is down 8%.

Northeast cities like Boston, down 6.2% for the 12 months, and New York, off 7.9%, have been less volatile than the Sun Belt."

Because Mays decline from April prices was only 1% versus a 1.5% decline the previous month, analysts are optimistic we have reached a bottom. From Fortune again:

""The smaller price decline in May suggests, provides a first hint, that conditions may start improving," said Mike Moran, the chief economist for Daiwa Securities America.

"If you look at home sales data, they're starting to stabilize," he said. "Some potential buyers have decided to step back into the market. They see attractive opportunities. I don't think the correction is over but the tone is improving."

I wish I could feel as optimistic. Look at the data. The amount of home inventory is at a record high and growing. Foreclosure only adds to this problem.

The real estate bubble really started in earnest in 2001 and I fear that we'll have to come down to close to those levels before we see the end in site. The banks support this contention. Bank stock prices are down at 2001 levels. Then look at what Merrill Lynch did today. It markes its CDO portfolio, which is backed by tens of thousands of mortgages, down to $.20 to the dollar. That means they expect that 80% of the mortgages that make up those CDOs will fail. 80%! Now, obviously this is a bit of a firesale and 80% is a bit high. But even if 50% fail the results would be catastrophic for home prices.

Don't let anyone fool you. We still have a lot of rough days to go.

Mortgage rates spiked nearly a quarter of a percentage point this week on inflation fears, trouble with Fannie Mae and Freddie Mac, and overall bank weakness. The rate on a 30 year mortgage hit 6.63%, its highest level since 6.68% in August of 2007. On the face of it doesn't seem like rates have really risen much at all, but consider that the economy is weak and housing sales and prices are falling and anything that impacts affordability is a problem.

"Market concerns about rising inflation, further weakness in the housing market and greater probability that the Federal Reserve will raise short-term rates this year all combined to push mortgage rates higher this week," said Frank Nothaft, Freddie Mac chief economist."

Mortgage rates have risen even while the Fed has cut short term rates. That's because mortgage rates are being buffeted by:

• Inflation fears which are pushing up long term bond rates.
• The financial problems of Fannie Mae and Freddie Mac
• The end of bank off-balance sheet financing.

I don't know if foreigners are pulling out of long term Treasuries and I'll have to research this a bit more. But if they are then that would be an additional factor in the rise of longer-term rates.

Will long-term rates come down or stabilize? If the price of oil drops below $100 as some are predicting and the Feds take steps to restart Fannie and Freddie its possible rates may stabilize or even come down. But even at 6.63%, 30 year mortgage is still historically a very low rate. It's just not as low as we've been accustomed to.

Freddie Mac may slow the purchase of mortgages from banks, reducing the amount of credit available to borrowers and driving up mortgage rates. Bloomberg reports that:

"`This just means much less credit availability for mortgage borrowers,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``They were teed up to be saviors of the mortgage crisis, but now they've got their own capital issues.''

I personally doubt that the government would allow this to happen. Bot Freddie and Fannie are heavily relied upon by the Federal government to keep the mortgage market moving.

As the article states:

"The $5.5 billion share sale planned by Freddie Mac may not be enough, according to Friedman Billings Ramsey & Co. analyst Paul Miller. He estimated in a report today that the companies will each need to raise $10 billion to $15 billion to replenish capital. The U.S. government will seek to avoid having the companies shrink their portfolios, he added.

``The government may have to intervene through a capital infusion, and in an extreme-case scenario, through taking on the agencies' balance sheet,'' he said.

This is another piece in the market realignmnent which is taking place which I believe will drive down credit available and real estate prices for many, many years.

Housing construction has dropped over the last two years as real estate sales have slowed. This makes sense since there is an oversupply of houses. The Department of Commerce reported yesterday that privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,091,000. This is 11.6 percent (±1.2%) above the revised May rate of 978,000, but is 23.9 percent (±1.3%) below the revised June 2007
estimate of 1,433,000.

Housing construction is a major part of the economy and a slowdown in this sector is thought to have reduced GDP between one-half to one percent.

It's also hurt some of the popular housing stocks. Toll Brothers, one of the nation's biggest builders, is down from its high of 55 in July 2005 and now trades at 19. Home Depot has also taken a tumble and is trading at half of its 52-week high.

Declining home prices hurt those of use who own. Our equity is slowly deflating. But for many people who decided to wait to purchase a home, the last week has put in play additional forces which will lower home prices.

On Monday, the Fed signed off on new mortgage regulations that make it tougher to get a loan. The new rules force lenders to document income, and also require lenders to ensure that homebuyers can afford the purchase once insurance and taxes are calculated into the payment. They are good rules but they will push many out of the housing market or lower what buyers can afford.

On the same day, the Wall Street Journal reported that mortgage insurance is becoming much tougher to get. The paper stated that:

"While it's difficult to guage the severity of the impact, industry executives concede that insurers' tigher standards are affecting the market." Michelle Collins, an executive at Shorebank, Corp. a community-development bank in Chicago said that "easily 70% of the previous set of borrowers will not be able to buy."

For those of you unfamiliar with mortgage insurance, it's often required by the mortgage lender if a buyer has less than 20% to put down on a house. It protecets the lender from a buyer who has little equity in their homes. Over the last couple of years, buyers got around mortgage insurance using 80-20 mortgages. The buyer would use a mortgage to finance the first 80% of the home and then use a second mortage or home equity loan to finace the remaining 20%. That practice has been wiped out, leaving buyers who don't have a downpayment with mortgange insurance as the only alternative. Now, for many even that option is closed.

Banking trouble will also depress home prices. With banks facing steep losses and having trouble with their balance sheets, they will reduce lending to all but the most credit worthy.

All of this means that there will be fewer people and fewer dollars in the market. Supply and demand tells us that if demand drops, so must price. And prices have fallen. The National Association of Realtors says that:

"The aggregate median existing-home price is projected to fall 6.2 percent this year to $205,300, and then rise by 4.3 percent in 2009 to $214,100."

This quote came out on July 8, a week before the current embroglio. I think based on recent events, their 2009 calculation is wishful thinking. I bet the fall in 2008 will be steeper than 6.2% and prices will continue to decline in 2009 and possibly into 2010. Prices will have to fall another 20% to get them back to 2001 levels, when things started to get crazy. The stock prices of major banks are falling back to 2001 levels so I think it's possible that housing could follow a similar trajectory.

All of this is somewhat depressing for a homeowner, of which I am one. But it's great news for first time buyers with good credit. If only I could have stayed in my apartment a few years longer.

Even as the economy melts down from past mortgage excesses, the mortgage market is already in transformation. The intermediate result will be a much more conservative mortgage market that will make it harder for borrowers.

The Washington Post reported today that the Federal Reserve voted unanimously (ironic that this happened on the same day that they also bailed out Fannie and Freddie) to pass a series of mortgage rules designed to protect homebuyers. Some of the rules include:

1. No more making loans with documenting a borrowers income.

2. Lenders must make sure borrowers can also pay for taxes and insurance.

3. Lenders must also take into account whether borrowers have other assets they can use to repay the loan, and not just the value of the home.

4. Lenders can't penalize borrowers who want to repay their loans early.

5. Ads and marketing material must more fully disclose fees, monhtly payments, and other loan features.

I think the legislation is great but doesn't that just eliminate about 50% of the people who have purchased a home over the last ten years? We're going back to the good ole days when you actually needed a downpayment and a salary to purchase property.

As if to underscore that fact, the mortgage insurers seem to be tightening up their standards and saying they are going to be pickier about who they choose to insure. The mortgage insurers I know provided coverage to people who put down less than 20% on their homes. It was called PMI - private mortgage insurance. Without it, the banks wouldn't lend.

In the bubble days, home buyers found they could get around it by doing an 80-20 loan. Borrow 80% of the value via a mortgage and the other 20% via a home equity line. Some people even borrowed 110% of the value of their house.

But now that's all pretty much over. As the WSJ reports:

"Stung by growing defaults, lenders are increasingly compelling potential borrowers to purchase private mortgage insurance. Mortgage insurance, required for buyers who are unable to make a full down payment or who have insufficient credit histories, reimburses lenders in the event of a borrower default. But over the past few months, mortgage insurers have been declaring more and more of the U.S. a "declining market," raising the requirements and making such insurance harder to obtain. The result: another hurdle for home buyers..."

Put it all together and you have a reforming, but much less potent mortgage market. With fewer people qualifying for loans and at lesser amounts, what do you think is going to happen to housing?

Ken Lewis held a town hall meeting for Countrywide employees 3 days ago. According to my sources, he said that the dividend is safe (this information is mainly for the consumption of Wall Street) and encouraged employees to open bank accounts.

Today, news comes that Countrywide is just leveling the staff of Bank of America. Virtually everyone outside of California has already gotten their walking papers and bad news is likely to sweep through the halls of Calabasas later today.

It seems that the only people who did well at Countrywide were the most senior management. The rest of the folks, including senior management, but not the most senior, is left with nothing. Unfortunately, these days that seems to be much too frequently the outcome at major banks.

Thanks Angelo.