Existing home sales fell modestly in September to 6.18 million units annualized, which is essentially in line with expectations.

"This glass is clearly neither completely full nor entirely empty," said Stephen Stanley from RBS Greenwich Capital.  "The bad news is that home sales continue to decline, with the September level the lowest since January 2004."

Stanley added that although one could focus on the negative year-over-year change in prices,  he emphasized that this measure of prices is not worth paying much attention to. On a more positive note, Stanley added that there are some important developments in recent months that are "at least mildly encouraging." First, there is the moderating pace of the decline in sales . Resales dipped by above 8% from March through July, with the 4% plunge in July "particularly disconcerting," Stanley said.

In the most recent two months combined, resales have slipped by less than 2 1/2%, implying that the downward momentum remains but may be slackening, Stanley said. The inventory situation also seems to be stabilizing. The months' supply of homes on the market ballooned from 5.6 to 7.3 from March to July but stayed at that level in August and September. Although this is not exactly a sign of strength, it suggests that things may be in the early stages of moving back into balance, as sellers are lowering their offer prices while potential buyers are starting to  look again.

In his write-up JPMorgan Securities strategic principal trader David Montano said that although existing home sales were down slightly from last month and are at the lowest level since early 2004, sales activity north of  6 million units could still be considered strong activity. He said that if dollar weighted, it still is considerably exceeds 2004 levels. Median sale prices dipped 2% year over year, with the biggest drop in the northeast.

Montano expects steady weakness in home sales until prices drop further. He said that there is still a strong back bid in the housing market, which is supported by near full employment. Thus, he expects that by the middle of next year, the pace of home sales will be rising again. Nevertheless, the next six months will most probably show discount prepays well below the seasonal average. He described Street research projections as remaining out of touch with the data. Specifically, the "consensus" of 9 CPR on 2003 FNMA 5s over the next few months seems "nothing short of absurd," Montano said. The next report will be close to 9 CPR but then dip significantly in November/December to a likely 6-handle by January. Slowing discount speeds combined with bank de-levering strongly argues for a more pronounced widening in coupon swaps, Montano said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.