by Calculated Risk on 9/06/2010 09:15:00 AM

The following graph shows the two bank stress test scenarios compared to the Case-Shiller Composite 10 Index.

Click on graph for larger image in new window.

The heavy government support for house prices has kept prices well above the baseline scenario. But is this good news?

With prices higher than projected, banks have taken fewer write downs than originally expected - and many homeowners have been able to refinance into Fannie and Freddie (or FHA insured) loans putting the future risk on the taxpayer. This is good news for the banks.

However, since prices are still too high in many areas, the market has not cleared and there is still too much inventory. Until the excess inventory is absorbed, there will be little new construction and few construction related jobs - and the recovery will remain sluggish.