Download PDF Version
The Core Logic National House Price Index (HPI) slipped 0.4% in August, but the index moved up 0.7% when foreclosures and short sales were excluded. The Core Logic HPI shows a decelerating pace of decline on a year-to-year basis (-4.4% vs. -6.3% in May 2011, see Chart 1). The more encouraging news is from the recent trend of home prices when distressed properties are excluded. Excluding distressed properties, the Core Logic HPI fell 0.7%, the smallest drop since May 2010 (see Chart 1). Anecdotal information suggests that backlogs of foreclosed properties have held back the decline in home prices. By implication, as the backlogs are cleared, they will have an adverse impact on the home prices in the months ahead.
Spillover from Eurozone Crisis Less than Lehman Impact, For Now
The impact of the persistent debt crisis in the Eurozone has a visible impact on markets in the United States. The VIX Index, capturing the volatility of the S&P 500 and a measure of investor sentiment, is trading close to 37.0, as of this writing. The recent high was 45.45 on October 3, 2011; the willingness to consider bank recapitalization in the Eurozone appears to have brought a small bit of relief. As shown in Chart 1, this reading matches the levels that prevailed as the Greek debt crisis unfolded in the summer of 2010. More importantly, the VIX hit a higher mark after the collapse of Lehman Brothers in the final months of 2008 (see Chart 2).
Interest rates at the very short-end and long-end have responded differently in magnitude compared with the Lehman Brothers experience. The upward trend of the 3-month Libor in recent days (0.38% vs. 0.26% in the early part of 2011, see Chart 3) is reflecting stress in markets as a result of the evolving debt crisis in the eurozone. But, as shown in Chart 3 and Chart 4 (Libor data for a longer period of time), the escalation of the 3-month Libor was larger in 2010 when the first round of the crisis in Europe reached a zenith. The level of dysfunction at the short-end after the collapse of Lehman Brothers is by far the worst (see Chart 4).
At the other end of the yield curve, the 10-year Treasury note yield, trading today around 1.99%, has posted significant rallies after the collapse of Lehman Brothers and during the 2010 debt crisis in Europe (see Chart 5). The recent rally at the long end is tied to Operation Twist, weak economic conditions in the U.S. and the debt crisis in the Eurozone.
The important unknown, now, is the larger economic impact of the Eurozone crisis on the U.S. economy. The U.S. economy stalled in the first-half of the year and led to the Fed implementing Operation Twist and indicating that the fed funds rate would be held unchanged until mid-2013. In recent months, U.S. economic indicators send a mixed message. Car sales posted a strong increase in September. The ISM manufacturing and non-manufacturing indexes both failed to slip below 50.0, which suggest that the economy has slowed but not entered a phase of severe contraction. However, housing and labor markets remain a major source of concern.