A Closer Look At Home Price Increases

Is the Case-Shiller Home Price Index a good representation of actual home prices? The following post from The Mess That Greenspan Made, explains some of the possible flaws in the calculation of the index and why we should take the numbers with a grain of salt. Continue reading to learn more.

Mark Hanson's comments on the recent upswing in real estate prices as indicated by the highly regarded S&P Case-Shiller Home Price Indexes. It seems that, almost every few months now, there's a new wrinkle in how home price changes are reported and, coming as it does amid what millions of people think is a bottom for home prices, this one's a doozy.

Mid-to-High End Sales – Very Important.
Not Representative of True Market

More mid-to-high end sales are occurring this year than last. They are not anywhere close to the bubble years due to the catastrophic loss of affordability through exotic finance but they have increased as prices fell. They are occurring at significant discounts to list prices and previous year’s sales as I have highlighted many times. At the same time, foreclosure-related resales are falling as demand from first-timers and investors who have carried the market for a year has peaked.

This seasonal mix-shift is almost exclusively responsible for the significant house price appreciation in any CA MSA’s over the past 90-days. Mid-to-high end sellers and buyers are the most seasonal of all. As soon as the summer warm months are over and kids are back to school these sales will drop considerably allowing foreclosure resales, which are not seasonal, to reclaim this mix. This will drop reported median and average house prices as early as September, which will be reported in October.

Here's the interesting part.

At this point, you might be thinking that Mr. Hanson has the calculation of median prices confused with the paired-sales methodology used by Case-Shiller, but he does not.

While I haven't read the details of how the index is calculated recently, one can immediately understand how the index values can be affected by how long the seller has owned the home after reading the following:

Who is the Mid-to-High end Seller? Why Is This Important?

Now, think about those that are selling these mid-to-high priced houses. It is not the person who bought from 2005-2007 on a Pay Option ARM with 5% down because they can’t sell. It is the person who bought years ago that has enough equity to dump the price, sell, and have enough left over for the down payment on the house they plan to steal in the desert.

Even with the price dump, a person who bought in 1999 for $450k — who saw their house price rise to $1.5 million by 2007 and subsequently drop to $700k — realizes a price gain and so does CS. Even though CS reduces the weighting of pair sales the longer ago they occurred — when this is all you have selling — it carries most of the weight.

The bottom line is that Case-Shiller reports what sold, period. It is my opinion that the real estate market is so thin and bifurcated that what is selling today is not representative of the true real estate market.

It likely is not accurately representing properties purchased during the bubble years that are now worth a fraction of their purchase price because they are not transacting.

This is apparently part of a private letter to clients. If anyone has a copy and would like to share some more details, please feel free to do so in the comments section or via email.

Maybe, I'll drop Mark a line and ask him if he would like to share any more details about this because my interest is piqued. Then again, I haven't checked Calculated Risk yet today and Bill might already have an analysis on this subject posted.

Anyway, this all makes a good deal of sense to me - aside from a few price ranges in a few areas of the country that may have hit bottom, there is much more work to do to get home prices back to more normal levels - and then there's the typical "overshoot".

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Data Shows Housing Market Improving

The latest from the S&P Case-Shiller Home Price Indexes shows that price declines are slowing down with some metropolitan areas showing slight growth in property values in April. See the following post from The Mess That Greenspan Made for more on the latest numbers from the housing market.

The April report(.pdf) for the S&P Case-Shiller Home Price Indexes showed an easing of home price declines across the country after months of record declines. From March to April, the 20-city index fell just 0.6 percent, its "least bad" reading since last June, and the annual rate of decline improved from -18.7 percent to -18.1 percent.

Note that the top-to-bottom end-positions of the curves on the right of the chart correspond to the order in the legend in the upper left to aid in viewing the data.



Poor Detroit continues to plumb new lows, the index falling from 71.67 in March to just 69.2 in April, well off the bottom of the chart.

As shown below, Phoenix maintained its leadership role in year-over-year price declines with an astonishing 35.3 percent plunge, only slightly improved from last month's 36.0 percent decline. Conditions worsened in Las Vegas, however, April's annual decline of 32.2 percent exceeding the 31.2 percent drop seen in March.

San Francisco moved from the 30+ percent decline group (indicated by red underlines) back to the 20+ percent decline group (indicated by blue underlines), however, there were no similar moves out of the 20+ percent decline group which now numbers seven.



David M. Blitzer, Chairman of the Index Committee at Standard & Poor's notes:

The pace of decline in residential real estate slowed in April. In addition to the 10-City and 20-City Composites, 13 of the 20 metro areas also saw improvement in their annual return compared to that of March. Furthermore, every metro area, except for Charlotte, recorded an improvement in monthly returns over March. While one month’s data cannot determine if a turnaround has begun; it seems that some stabilization may be appearing in some of the regions. We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here.

The stock market bottomed in March and measures of consumer confidence have turned upward. This report shows that these better spirits are also appearing in the housing market.

Mr. Blitzer doesn't appear to be quite convinced yet - "some stabilization may be appearing in some of the regions" is not exactly a ringing endorsement of a return to normalcy.

It will take at least a few months of actual increases in prices before a bottom can reasonably be called. When exactly that happens is anyone's guess - my guess is that it won't be this year.

This article was republished from Tim Iacono's blog, The Mess That Greenspan Made.

Yale Economist to Housing Optimists: Not So Fast

There has been a lot of optimism of late about the housing market showing signs of price stabilization with many investors looking forward to a rebound. But Yale economics professor explains why the housing decline may not be over. See the following post by Tim Iacono from The Mess That Greenspan Made.

In this NY Times op-ed, Yale economics professor and housing market guru Robert Shiller splashes some cold water on the recent housing market fervor in such places as Arizona.

Why Home Prices May Keep Falling
Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time.

Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.

A national home price decline of 48 percent would imply a decline of, what, about 80 percent in Phoenix? That may be a very efficient and rational market.

He goes on to explain why home price declines go on for much longer than most people really understand, especially those who think they're snapping up such bargains today.

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

It used to be conventional wisdom that, unless you were financially strapped, once you became a homeowner you would forever be a homeowner. If you were transferred from one town to another, you'd put your house up for sale, go out to the new place, look around for a few days, buy a house, and move in.

That seems to be changing and one of the most important reasons is that people can't sell their existing houses - at least not at the price they want.

It will be interesting to see if the U.S. housing bust fundamentally changes the way Americans think about home ownership.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.