Yesterday...

Rates rose sharply on Monday, pushing Treasury yields up 20bp or more and returning yields to their early-March/late-February levels across the curve.  The FHLB got final approval to double mortgage investments. While several reasons were raised for the MBS sell-off, it appeared technical in nature with participants having decided that yields had just moved too far, too fast. Yesterday's sell-off, along with the prior Monday's, was one of the most severe one-day routs in years. JPMorgan's increased offer for Bear helped lift stocks as did the existing home sales report. In February, existing home sales rose 2.9% but the optimism with which that rise in sales generated appears naive. The data was heavily influenced by seasonals; the median price plunged 8.2% year-over-year (a record decline), and foreclosures are piling up. Note that the biggest monthly increases in existing home sales for the past three years have occurred in February including last year's 3.4% rise which was followed by continual disappointments. We have entered a phase in the housing decline in which the data will be more volatile, regional differences greater, and trends harder to discern as lenders dump foreclosures, housing stock is worked off, and housing seeks to find a bottom. This morning, Treasury prices are higher, recovering part of yesterday's losses. Mortgage spreads are wider, retracing some of their recent tightening. Expectations for Fed tightening have diminished as other measures have shored up liquidity. Futures are projecting that 1.75% to 2% will be the floor.

This morning...

Case-Shiller home price index was released this morning.  Click here for the Press Release.

BOTTOM LINE: House prices dropped even faster than expectations, down by 10.7% year over year for the Case Shiller 20-city index. The rate of decline continues to deepen, with the January reading equivalent to a more than 20% pace of decline on an annualized basis.

S&P/Case-Shiller 20-city Home Price Index -10.7% yoy (in Jan) vs. consensus -10.5%

KEY POINTS:
1. The Case-Shiller House price index, our favorite of the various house price indexes, continues to show that house prices are falling very fast. In January, they fell by 10.7% year over year -- worse than expectations of 10.5%. Since 11/12ths of the data is already known, this is a more substantial downside surprise than it looks at first glance. The behavior of the 10-city index was essentially the same.

2. Seasonally adjusted, the monthly reading for January indicates that house prices are falling at over a 20% annual rate. Further, the declines are still steepening as they were falling at just under 20% in November and December of last year. The raw data are not seasonally adjusted, so we perform our own on it; the seasonal adjustment we do is of the "quick and dirty" variety, but is indicitive of general trends.

3. Prices in all cities fell in the most recent month. Moreover, on a year over year basis prices are now falling in 11 of the 20 cities that comprise the index. The one exception, Charlotte, is only barely positive and prices there have been falling over the last several months. The housing bust is very clearly national at this point. Some areas are still worse than others -- on a seasonally adjusted basis, it appears that prices in Phoenix and Las Vegas are falling at rates of 35%-40% (annualized).

Consumer Confidence is index tumbled 12.3 points in February.  Click here for the Press Release.