MBS MID-DAY: 1/11/2012

LPS Home Price Index Shows U.S. Home Prices Declined 0.8 Percent to Late 2002 Levels in October; Early Data Suggest 0.5 Percent Drop in November Likely

The LPS HPI national average home price for transactions during October 2011 was $200,000 – a decline of 0.8 percent during the month relative to September, reaching a price level not seen since October of 2002 (Figure 1, Table 1). This is the fifth consecutive month of decreases in prices. The partial data available for November suggests more moderation of price declines to approximately 0.5 percent. LPS reported partial data from October transactions in its December report, which proved a reasonable indicator for October's performance: it showed a preliminary 1.1 percent estimated decline, compared to the 0.8 percent for the full month’s data.

LPS HPI average national home prices continue the downward trend begun after the market peak in June 2006, when the total value of U.S. housing inventory covered by the LPS HPI stood at $10.6 trillion. Since that peak, the value has declined 30.1 percent to $7.5 trillion. During the period of most rapid price declines, from June 2007 through December 2008, the LPS HPI national average home price dropped $56,000 from $282,000, which corresponds to an average annual decline of 13.8 percent. Since December 2008, prices have fallen more slowly, interrupted by brief seasonal intervals of rising prices. During this period of more slowly declining prices, the national average price has fallen approximately $26,000 from $226,000.

It's ironic that the original lyrics to "Silent Night" were written in German ("stille nacht,") because our overnight sessions continue to be anything but silent with most of the would-be silence broken by the same language. If US markets aren't simply following German Bunds in uninspired trading, Angela Merkel or Schaueble or some other German entity is likely to be having an effect on where US Treasuries are moving overnight and less-directly, where MBS walk in the door for the NY Session. Last night was no exception.

Bond markets drifted aimlessly higher until Germany auctioned off 5-yr Bunds with better-than-previous results. That positivity was kicked into higher gear when the BDB, The German Banking Association (yeah, that would be GBA, right? But over there it's the Bundesverband deutscher Banken, we promise) popped off a few newswires including a comment that the situation in Greece was still explosive, and the more likely mover that the new financial transaction tax could reduce banks' earnings by 5-10 pct.

The biggest moves of the morning (both in price and volume) came out of the Merkel/Monti talks just before the NY Open. The "biggie" was ostensibly Merkel's comment that Germany would be prepared to pay more capital into the ESM in order to "send a message" to markets.

With some additional assistance from Fed-Speakers this morning (Lacker and Evans) volume has picked up to its best levels of the week. 10's are currently down just over 2bps at 1.942 and MBS a mere tick higher than their post-roll close at 102-27. The only "biggie" left on the domestic calendar is today's 10yr Treasury Auction at 1pm.