A warning that the National Association of Home Builders Housing Market Index will stay below 20 is that the NAHB is lobbying Congress to extend and enhance the $8,000 first time home buyer tax credit, which will expire at the end of November. They suggest extending the plan for another year, and making it available to all buyers of principal residences.

Their concern is that without the stimulus of continued home buyer tax incentives and with unemployment projected to rise above 10%, the “so-called” economic recovery will likely falter as housing is 15% of GDP.

The market for new homes is also being adversely affected by low home appraisals, and continued tight credit standards. Appraisals based upon distressed and foreclosed sales hurt the value of new homes.

Some new home sales are failing only because appraisals are coming in below contract price.

Community banks facing defaulting construction and development loans are reluctant to extend credit to new developments that have been budgeted for current market conditions. Like the Housing Stimulus bill, which allows mortgage modifications, builders want a similar plan so that unsold homes and empty lots can be sold and removed from the balance sheet.

Will the Federal Reserve Be More Optimistic?
Fed chief Bernanke has been singing a more optimistic tune lately, but realistically it could be another year or more before the FOMC raises the federal funds rate. Before doing that they will allow the quantitative easing programs in place to expire as scheduled by year end. After all, quantitative easing did not work in terms of US Treasury yields, which have been on the rise since the program was announced in March, and mortgage rates are essentially at the same at 5.5%.

Experts say that the Federal Reserve has averted a second Great Depression, but in my opinion that was never the risk. What we have is “The Great Credit Crunch” and that’s far from over.

All the economists and strategists that say that the economy has turned the corner will soon realize that we turned the wrong way on a one way street to Wall Street, while Main Street deteriorates further with higher unemployment and with states still facing huge budget deficits.

A 2010 recovery will be difficult with half the stimulus spent and with many states exhausting their emergency funds. Stimulating the housing market is the key to avert a deeper credit crunch.

Commercial property values have falling since October 2007 and there are $1.08 trillion in nonfarm, nonresidential loans on the books of our nations’ banks.

Construction & Development loans and Nonfarm, Nonresidential real estate loans has been my stated Achilles Heel for smaller banks, as 47% of these loans are underwritten by community and regional banks. This exposure has been the primary cause for the 97 bank failures since the end of 2007.

The S&P 500 remains overbought on its daily chart but MOJO fell to 8.5 from 9.0 on Monday. My annual pivot is 967.1 with today’s resistance at 1013.7. It seems like a pattern of lower highs has begun.