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September 30, 2010 (FinancialWire) (By Dr. Joe Duarte) — The action in the S&P Homebuilders ETF (NYSE: XHB) suggests that the market is seeing a bottom in housing, but it’s hard to fathom, given the overall condition of the marketplace.

Housing became the most important part of the U.S. economy in the last decade. When the housing bubble burst, the economy hit the skids. And despite persistently bad news from residential real estate, the housing stocks have stopped falling.

That's an interesting development, given the fact that banks have had to stop the pace of foreclosures because they can't get rid of the houses that they already own. That means that there are still more houses to hit the market at some point in the future, and that the likelihood of rising prices for homes is dismal. For example, CNBC recently reported that a survey from real estate web site Zillow.com concluded that 1/3 of Americans can't qualify for a mortgage in the current environment. That suggests that there will be fewer home buyers for a long time, while the number of homes available will likely remain steady or rise.

Yet, XHB seems to have formed a double bottom and has clawed its way above its 200-day moving average.

Somewhere, there is a disconnect. Should we rush out and buy homebuilder stocks? That's a tough call right now, unless you have a very long time horizon and a lot of patience, or are very nimble and able to trade well for the short term.

The rise in local taxes is becoming an increasingly important factor in the outcome of key political races in the November election.

It may make little sense, unless you think about it for a bit. But Washington has a much deeper connection to local taxes than it thinks. For one thing, any talk of taxes during the campaign season will likely meet with resistance at the local level, where taxes have already been on the rise.

According to The Wall Street Journal: "As Washington is consumed with the debate over whether to extend Bush-era tax cuts beyond the end of the year, voters in many parts of the country are focused on state tax increases already hitting them." In fact, The Journal reported: "In fiscal 2010, states raised taxes by the largest amount since at least 1979, according to the National Governors Association, a bipartisan group that represents the country's governors, with 29 states increasing taxes by about $24 billion. The rise was reflected in Census Bureau data out Monday, showing that state and local tax collections rose in the second quarter, partly because of tax increases and also due to some improvement in the economy."

What's the connection? As The Journal points out: "This on-the-ground reality is affecting midterm-election campaigns—particularly for aspiring Congressmen coming out of state government—and is further threatening Democrats' plans to end some Bush cuts. Some candidates, under attack from Republican rivals, have already broken with the party's leadership, which wants to let the top two rates return to their higher, Clinton-era levels."

The story is a bit more complex than meets the eye. The bad economy led to lower tax collections. But cities and state governments, who have to balance budgets have raised taxes, and or fees in order to make up their deficits. According to The Journal: "At least 10 states have raised income-tax rates, at least temporarily, on higher earners in recent years. California created a special top bracket of 10.55% for people making more than $1 million, according to the Tax Foundation, a research group. Oregon created two new top rates, for people making more than $125,000 and more than $250,000. New York, New Jersey and Connecticut all raised rates for higher earners."

Other fees have also risen. The Journal reported: "Some states have also increased sales and business taxes. Colorado and Washington expanded their sales taxes to candy and soda, and Colorado began taxing restaurant takeout containers. New York recently raised its cigarette tax to $4.35 a pack, the nation's highest, up from $2.75 last year."

And that means that if the Bush tax cuts expire, for those that make above $250,000, the tax burden will be higher than it was during the Clinton era.

Already, the state tax cuts have had a negative effect on the economy. According to The Journal: "The overall rise amounts to 0.25% of consumer spending in the U.S. and 2% of spending on durable goods."

The federal government may be too late to the tax hike party as states and local governments have already been at the trough. The net effect is that taxpayers may have reached what The Journal calls the "tipping point."

There is already some evidence, as we note above, that the state and local tax increases may have contributed to the economy's poor recovery.

What's the take home message? Tax policy is already a local and state issue for this election. If and when Congress acts on the Bush tax cuts, it could be a significant factor in the outcome for incumbents in November.

(Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte, and go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

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