This past week the White House downgraded their assessment of the economy when they contracted their GDP projection for 2010 from 3.2% to 2% and increased their original unemployment outlook from below 8% to 9.8%.

There are two concerns with unemployment.  The first is the actual percent, and the second is the duration.  What the White House is predicting, and keep in mind they have been behind the curve on this recession for the past two years, is that 2010 is going to be worse than 2009 in terms of sustained high unemployment.  Unemployment is expected to average "only" 9.3% for 2009.

What this means for the housing market is that we are going to see continued record setting foreclosure rates for another 12 months, maybe longer.  Already, in July, according to RealtyTrac, foreclosure filings were at a record high, and were up 32% from last year.

Additionally, a recent report published by Fitch Ratings showed that consumers are already on the brink.  According to their study, the "cure rate"  for delinquent mortgages plunged to just 6.6% when compared to 45% from the years of 2000-2006.  What this communicates is that once a homeowner falls behind on their mortgage payment, there is only a 6.6% chance they are going to get caught up.  And considering the MBA is reporting that a record 13.16% of all mortgages are at least 30 days late or in foreclosure, it paints a very worrisome picture for the housing market.

Yes, demand for housing has rebounded from the bottom thanks to a Fed $1.25 trillion funny money policy.  But it appears that foreclosures are going to rise at a greater rate than the demand for them.  This means we will be looking at at least another year of continued price deterioration in the housing market.  And this assumes that the Fed doesn't begin to contract their monetary policy yet. 

According to the Census Bureau, new home sales jumped 9.6% from June to July to a seasonally adjusted annual rate of 433,000.

This is the highest rate of home sales since August of 2008.  However, new home sales are still down -13.4% from last July.

The inventory of unsold new homes fell -3.2% from last month to 271,000 and is down -35.3% from last year.  This is a massive improvement and as a result, the month's supply of housing fell to a 7.5 month supply.

There are all positive indicators for the new home market.  As new homes are built, jobs are created, supplies and materials are purchased, and local municipalities benefit from new sources of tax revenue.

The question that remains, as it does with the broader economy, is whether or not the housing market will be able to sustain these improvements once the Fed begins to tighten the monetary policy and raise rates.

The Fed has committed to purchase $1.25 trillion in mortgage backed securities and has kept the federal funds rate at near zero.  And yet despite this funny money policy, the new home market is still off -13.4% from the pace last year.  What happens when the Fed removes this stimulus?

The MBA reported on Wednesday that the mortgage purchase application index rose 1% this past week to 280.5.

While the reading of 280.5 does not represent overly encouraging demand for real estate, the index has slowly risen for four consecutive weeks.

The 30-year fixed rate mortgage rose from 5.15% to 5.24% for the week ending August 21st.

Between the recent surges in existing and new home sales, as well as the past four weeks of mortgage purchase applications, it appears that demand has stabilized thanks to precipitous home value declines, an $8,000 first time home buyer tax credit, and a $1.25 trillion Fed funny money monetary policy.

Unfortunately, the context that is being lost is that while demand has rebounded back to pre-September of 2008 levels, foreclosures (supply) are escalating at a greater rate than demand is. 

According to RealtyTrac, foreclosure filings were up 32% year over year in July to a new record high while exisiting home sales were only up 5% during this same time frame.

On Monday CNBC's Diana Olick wrote a post about mortgage cure rates.  For those of you who haven't read her stuff before, I recommend it.  She is one of a very small minority of housing analysts who understand the comprehensiveness of the housing market.

A cure rate is a term used to represent the percentage of delinquent loans that are returned to "current" status each month.

In other words, for every 100 loans that are delinquent, how many of the owners will get caught up with the payment they have missed.

According to Fitch Ratings, Olick writes that from 2000-2006, 45% of loan delinquencies were being cured.  That percentage has dropped to just 6.6% now.

More interesting, of the 6.6% that are being "cured", approximately 25% of those are from loan modifications.  Unfortunately, statistics have shown that loan modifications have high re-default rates when measured over a period of several months.  

What this cure rate study reveals is that many home owners are on the brink and are unable to rebound as they have before in the past.

This Fitch study, when combined with the recent MBA delinquency study which showed that 13.16% of all mortgages were at least 30 days late, reveals that a massive number of loans will be going into foreclosure over the next 12 months.

While home sales have increased over the past couple of months, the number of foreclosures continues to increase at a greater rate.  This means that home values will continue to erode.

Case-Shiller announced today that home prices rose in June from May by 1.4% for both the 10-city and 20-city indexes.

I'm still trying to figure out why this makes headlines and why people think that this indicates that the housing market is bottoming.

Of course home prices rose from May to June.  They did it in 2007 and 2008 too.  They do it every year.  It is called a seasonal variance. 

According to the NAR the median home value rose from $222,700 to $229,000 in May of 2007 to June of 2007.

And then again in 2008, the median home value rose from $207,900 in May to $215,000 in June.

And here we are in 2009, and the median home value according to the NAR rose from $174,700 in May to $182,000 in June.

It's what home values do.

In order to better understand real estate trends you need to compare year over year data.  Just as a weather man wouldn't compare June temperatures to those in December, you can't compare month over month data unless the data is seasonally adjusted.  The Case-Shiller index is not seasonally adjusted.  

According to Case-Shiller, year over year, from the 2Q of 2008 to the 2Q of 2009, home values have fallen by -14.9%.  Over this same time frame, the NAR reported a -13.8% decline.

On July 3rd, more than half-way through the year, I wrote a post that the number oif bank failures had reached 52.  Now here we are, less than two months later and that number has exploded to 81.  We have had nearly 30 bank failures in less than two months.  That is a pace of nearly one every other day.

The most notable of the bank failures this weekend was Guaranty Bank, it was the third largest this year.

The systemic cause of these failures is falling asset prices, specifically residential and commercial real estate.  The problem is that despite aggressive monetary efforts by the government, asset values are still falling.   

Monetary policy is not working because it is not targeted, it is not timely, and it is anything but temporary.  Monetary policy is broad, slow, and long-lasting.  And yet despite the impotence of monetary policy, Washington continues to step on the gas. 

On the other hand, fiscal policy is cost-effective, timely, targeted, and temporary, and yet despite this, Washington continues to ignore it and is allowing asset values to continue to deteriorate.        

With existing home sales rebounding this past month to the fastest pace since the financial crisis made land-fall in September, it begs the question, was the Fed's monetary policy of purchasing $1.25 trillion in mortgage backed securities worth the cost?

To put this Fed monetary intervention into perspective, it was nearly the size of the TARP and the stimulus package...combined.  And yet despite this, it has not received much attention.  Part of the reason may be because it is not "tax-payer" money, it is new money that the Fed has printed.

The implications of the Fed's $1.25 trillion monetary policy is that rates are going to surge.  It may not happen in 2009, or 2010, but it is going to happen, and when it does, the housing market is going to be in a lot of pain.  Is the current monetary policy only creating another crisis down the road?

As I have written about before, monetary policy is one of the most costly, inefficient, and encumbersome methods in dealing with this housing depression.  On the other hand, fiscal policy is one of the most cost-effective, targeted, and timely strategies that the government has at their disposal.  Unfortunately, Washington has been reluctant to aggressively use fiscal policy to address falling property values, residential nor commercial.  

Here is a look at the results of the Fed's policy on impacting demand for real estate over the past several months.  The first numbers are the seasonally adjusted annual rate of existing home sales according to NAR.  The mortgage rate data is taken from Freddie Mac.  There is very little correlation between lower mortgage rates and increased home sales. 

Sep 2008:  5.10 million sales / 6.04%

Oct 2008:  4.94 million sales / 6.20%

Nov 2008:  4.54 million sales / 6.09%

Dec 2008:  4.74 million sales / 5.29%

Jan 2009:  4.49 million sales / 5.05%

Feb 2009:  4.71 million sales / 5.13%

Mar 2009:  4.55 million sales / 5.00%

Apr 2009:  4.66 million sales / 4.81%

May 2009: 4.72 million sales / 4.86% 

Jun 2009:  4.89 million sales / 5.42%

Jul 2009:  5.24 million sales / 5.22%

The concern is that while home sales have "recovered" to pre-crisis levels thanks to the $1.25 trillion Fed investment, could the same success have been accomplished without it?  To put this into perspective, the $8,000 first time home buyer tax credit will likely only cost the government between $10 and $20 billion. 

With all of the talk about a housing bottom, I thought I would point out a small little statistic that the media continues to overlook...home values are still falling.  And they are still falling in all four regions that the NAR tracks. 

Specifically, the median home value fell by -15.0% in the Northeast, -5.9% in the Midwest, -7.1% in the South, and -28% in the West.

According to the most recent NAR existing home sales report, the national median home value fell -15.1% from July of 2008 to July of 2009. 

Here is what the year over year percentage change in the median home value has looked like over the past several months according to the NAR:

Jun 2008:  -6.1%

Jul 2008:  -7.1%

Aug 2008:  -9.5%

Sep 2008:  -9.0%

Oct 2008:  -11.3%

Nov 2008:  -13.2%

Dec 2008:  -15.3%

Jan 2009:  -14.8%

Feb 2009:  -15.5%

Mar 2009:  -12.4%

Apr 2009:  -15.4%

May 2009:  -16.8%

Jun 2009:   -15.4%

Jul 2009:   -15.1%

While the argument can be made that the "pace" of home value declines is slowing, and there are plenty of people who will try to make that argument, those same people need to also account for the fact that the pace of foreclosure filings just set a new record in July, according to RealtyTrac.  The trend is for deeper and prolonged property value declines in the absence of a real housing stimulus.

The NAR published their monthly existing home sales report on Friday which showed that home sales rose 7.2% in July from June on a seasonally adjusted rate and are up 5% from last year at this same time. 

This is clearly good news as the real estate market needs a massive increase in demand in order to absorb the excess supply of homes that is sitting on the market as well as the foreclosures that are about to hit the market. 

The interesting statistic within the report that didn't make the headlines but is just as relevant is that housing inventory, the number of homes for sale, also rose 7.3% from last month.  This could be the first indicator that the foreclosures that were held back by the moratoriums that expired in March, may slowly be making their way to the market.  Typically there is a delay in time from when a property is actually foreclosed on to when it goes back up for sale.

The "net" result is that the month's supply of housing, which represents the relationship between supply and demand, remains unchanged from the previous month with a 9.4 month supply.  This month's supply still indicates that home prices are going lower.

As I have written about before, while these increases in home sales are good, they are insufficientin dealing with the number of foreclosures coming to the market.  According to RealtyTrac, foreclosure filings set a new record in July and are up 32% year over year. 

The MBA announced today in their quarterly delinquency report that a new record 13.16% of all mortgages were at least 30 days late or already in the process of foreclosure.  This was an increase from the previous record of 12.07% during the first quarter of 2009. 

The MBA's chief economist, Jay Brinkmann, was quoted as saying, "As for the outlook, it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves."  His prognosis, while not unique, is cause for concern as many economists don't expect the unemployment rate to peak until mid 2010.  Banking analyst Meredith Whitney recently projected that unemployment could peak at 13%, something that would severely impact the banking system and housing market. 

With all of the talk about a housing bottom, what the housing bulls continue to overlook is that the number of homes going into foreclosure continues to outpace the demand for them.  According to RealtyTrac, foreclosure filing were up 32% year over year in July, while existing home sales were down -0.2% year over year in June.

You can't have a housing recovery when more people are losing their homes than there are people buying homes.