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The August 2009 S&P/Case-Shiller Home Price Indices report showed continued month over month improvement while the decline from the prior year same period continues to ease. Reporting on this report has been decidedly positive over the past 6 months, cited by many as evidence that housing has bottomed. The report shows that prices are at 2003 levels, which is consistent with my personal experiences with the systemic breakdown of the mortgage process. Back in 2003, the pressure came on the appraisal industry full bore to keep the pipeline full as underwriting restrictions became seemingly non-existent.
Here’s the press release.
My friend Barry Ritholtz over at Big Picture does a very interesting analysis on the high end of the market showing that it now only represents 10% of sales over $500k, a staggeringly small percentage. Barry and I are speaking on a panel today at The Realty Alliance.
Since CSI index is value weighted, the shift in the mix and surge in lower priced foreclosures will likely turn CSI negative in the near future, as early as next month.
In fact, the CSI press release suggest this and feels like our expectations are being managed a tad:
Once again, however, we do want to remind people of the upcoming expiration of the Federal First-Time Buyer’s Tax Credit in November and anticipated higher unemployment rates through year-end. Both may have a dampening effect on home prices.
Since residential housing indices trail the current market by about 4-5 months from “meeting of the minds” to actual reporting of the index (contract date => closing date => recording date => index reporting date) the people that work with this data already have a fairly strong impression of where the index will be next year and even the subsequent month.
If we can’t take the indices at face value when they show a decline, then perhaps the same ought to be true when the indices go positive? The take away here is there is no single barometer of the state of housing.
Here’s the 20-city index breakdown.
As I like to say: “The trend is your friend until it ends.”
In Floyd Norris’ column this weekend titled After a Bumpy Ride, Back at Square One illustrates how housing prices are back to 2001 after adjusting for inflation.
During the period, the Standard & Poor’s Case-Shiller 20-city composite index of home prices rose almost 21 percent. The Consumer Price Index also rose almost 21 percent.
Now foreclosures are still rising, even as home sales and prices seem to have stabilized. If the worst is over, it will have been a wild ride that ended very close to where it began, but with many people much worse off for the experience.
The takeaway is that home price performance varies significantly by area so the national number doesn’t mean to much to your local market. However, it would appear that because the boom was born out of credit, the housing market may over correct.
Not relevant to post but who cares – aside: How social media are like sex
From the Case-Shiller Index Report released today:
“For the second month in a row, we’re seeing some positive signs,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The U.S. National Composite rose in the 2nd quarter compared to the 1st quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-City and 20-City Composites posted monthly increases, as did most of the cities. As seen in both seasonally adjusted and unadjusted data, as well as the charts, there are hints of an upward turn from a bottom. However, some of the hardest hit cities, especially in the Sun Belt, show continued weakness.”
The press release has the monthly 10/20-city, quarterly 10/20-city and national index with monthly and year over year data and references to month, quarter and year are all interspersed so its tough to follow.
Here’s what it looks like – The 10-City and 20-City Composites recorded annual declines of 15.1% and 15.4%, respectively. These are also improvements from their recent respective record losses of -19.4% and -19.1%. The 10-City and 20-City Composites posted their second consecutive monthly increases. Both indices were up 1.4% in June over May, and up 0.5% in May over April. Eighteen of the 20 metro areas saw improvement in their annual returns compared to those of May. Looking at the monthly data, the same 18 metro areas reported positive returns in June.
For the national composite, housing prices rose 2.9% from Q1 to Q2 and fell 14.9% from the prior year quarter before seasonal adjustments.
In other words, the indexes show improvement in the short term.
Shiller notes a change in mindset:
“The animal spirits seem to be coming back,” said Robert Shiller, Yale economics professor and developer of the Standard & Poor’s/Case Shiller Home Price indexes. “The psychology does seem to be changing.”
But Shiller is cautious about the good news:
“The really important things [affecting home prices] are unemployment and momentum,” said Shiller, who is a Yale economist. “We have momentum, which is very important, but we also have high unemployment.”
And, he added, “the government has not yet handled the foreclosure problem.”
The May 2009 20-City Case-Shiller Composite Home Price Index fell 17.1% from May 2008, the fourth month in a row that the y-o-y rate of decline for the index gotten smaller. 17.1% is still a sharp decline.
“We may be on the way to recovery,” said Maureen Maitland, vice president of S&P’s index services. “I say ‘may’ because it’s only been a couple months of data and home prices are seasonal … It will take a couple more months to see if we have turned around.”
This quote from S&P kind of confused me since, S&P/CSI has been seasonally adjusted since November 2008.
What’s got everyone so excited is m-o-m:
Looking at the monthly data, 13 of the 20 metro areas reported positive returns; and the 10-City and 20-City Composites reported positive returns for the first time since the summer of 2006. To put it in perspective, these are the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing”.
WSJ/Real Time Economics has a nice summary of the release.
Remember, this index tracks prices only, not sales activity. Sales trends lead price trends.
I think the takeaway with the release is that the rate of decline is getting smaller which is a good thing and it does suggest the potential for improvement going forward. But this provides no support that the moment is at hand and its only up from here. Still, I’ll take what I can.
WET BLANKET UPDATE: Confidence among U.S. consumers fell more than forecast in July
The general media coverage focus on the April S&P Case Shiller numbers talks a lot about the 3rd consecutive month of the ease in the rate of price declines. But the jobs outlook slipped, sapping consumer confidence.
An interesting, and in my view, likely housing double dip may be seen in the Case Shiller Index caused by performance differences in the bottom and and top half the the market.
Here’s the 20-city breakdown:
While the Case Shiller Index isn’t a tool to price specific property or markets, it shows macro trends and does a lot to set consumer housing market psychology.
Here’s Shiller’s interview on Fox Business today (I was interviewed by the same anchors about 30 minutes later on the issue of HVCC) talking about his new trading tool for housing. Mike at Altos Research does a brilliant job explaining how the new ETF works.
S&P released their Case-Shiller April 2007 index today A Hodgepodge of Declining Growth Returns in Home Prices According to the S&P/Case-ShillerÂ® Home Price Indices [pdf] showing further housing market weakness.
A review of the decline in home price returns on a regional level shows no region is immune to the weakening price returns,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC.
[question: is “hodgepodge” a macro econ term? I’ll check with Yoram Bauman.]
The index showed the fourth straight drop and the biggest decline since the index started in 2001. An index of 10 metropolitan areas fell by the most in at least 16 years. The Bloomberg article also has a heading that describes the index as most accurate. One gets the impression that a lot of effort is being spent by the S&P public relations machine to sell the credibility of the S&P/Case-Shiller index. News coverage tends to include something like what was presented in the Bloomberg piece:
The S&P/Case-Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track individual homes through repeat sales and more accurately reflect price trends, economists say. The measures from Commerce and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.
OFHEO may feel threatened by the S&P/Case Shiller Index full court press and felt the need to substantiate their validity through a [pause while holding breath and say slowly] white paper called “A Note on the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes [pdf]” written by Andrew Leventis dated June 22, 2007.
(Hap tip to a colleague who has lost more Blackberries than anyone on the planet.)
The fact that a government agency would go on the offensive to dress down a private sector competitor is unprecedented. Since the S&P/Case Shiller Index hasn’t done anything wrong, I can’t come up with a reason for this strategy.
Of course OFHEO is likely feeling the heat on several fronts, ranging from suggestions that they be replaced by another agency, their lack of oversight during the Fannie Mae accounting scandal and large bonuses just announced to their executives. They have been releasing other research works lately as well.
OFHEO basically says they are better than Case-Shiller because:
Case-Shiller is a monthly index and OFHEO is a quarterly index, plus OFHEO only includes transactions with mortgages less than $417,000 (include values of refinance mortgages) and excludes a large swath of metro area prices.
Case-Shiller and OFHEO Indexes are similar because:
Its a battle between government (OFHEO) and academia (Case-Shiller). I am hoping for a response from Case-Shiller although I doubt there will be one.
The benefit to the real estate consumer in all this whining and grandstanding exercise is more awareness of what these indexes actually offer and possibly allow for more transparency in the future. In other words, a hodgepodge of possibilities.
Professor Robert Shiller has leveraged his repeat sales index by developing a new monthly national housing market report with Standard & Poor called S&P/Case-ShillerÂ® Home Price Indices. I find that repeat sales indexes can be very inaccurate and lag the market because they don’t reflect changes in the houses being measured for multiple sales, the data set is too thin, and the response to sudden changes in a market is delayed. This particular report addresses composites of 10 and 20 metro areas so its not really a national housing market indicator since metro areas are distinctly different markets than outlying areas. However, the index seems to address one of their biggest flaws:
Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.
“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”
Its the first time in 11 years that home prices go negative. A possible theory for the weakness is relating to the interplay between new home sales and existing home sales. I am not sure I buy into it but its interesting to consider nevertheless.
The lag in timing on this index is really showing the markets around the November 2006 election since the study is based on January 2007 closings. At -0.2% and -0.7% for the 10 and 20 city composite, its is a significant drop from the 15% annual appreciation rates seen a year earlier but not unexpected.
I know economists are paid to worry, and I am not cheerleading here, but does Professor Shiller have to use the word dire in his description?
U.S. single-family home prices are back to early 2003 levels, according to the Standard & Poor’s/Case-Shiller home price indices for January, released today.
The index shows annual declines of 3.9 percent and 3.8 percent for the 10- and 20-city composites, respectively. Both composites saw price declines of 0.8 percent in the month of January.
Both the 10- and 20-city composites are at their lowest levels since the peak of the market, in 2006. Today’s numbers represent a 34.4 percent decline since that peak.
Denver, Detroit and Phoenix were the only cities to post positive annual growth rates of 0.2 percent, 1.7 percent and 1.3 percent, respectively, the data from S&P shows. Atlanta posted the lowest annual return and only double-digit negative return at 14.8 percent.
New York City posted drops of 0.8 percent month-over-month and 2.9 percent year-over-year, but the data only reflects single-family homes so it is a poor indicator of the New York City housing market, and especially that in Manhattan.
But appraiser Jonathan Miller, president at analytics firm Miller Samuel, said the numbers should not be cause for alarm. “[The index is] oriented towards [asking] ‘when are we going to bottom?’ and really, the question should be ‘when are we going to stabilize?’”
Miller also cautioned that the widely cited index “lags the market,” providing information about housing prices six months earlier. That said, he cautioned that the market and the index would “stay negative,” for approximately the next year and a half, as median prices decline due to an increase in foreclosures in the wake of the recently signed mortgage settlement. He said that agreement will be treated as a sort of “go signal for foreclosures to ramp up again,” after the reprieve the housing market saw in the wake of the robo-signing scandal.
John Tashjian, principal at Centurion Real Estate Partners, agreed, though he was more optimistic. “Only after existing inventories are depleted and foreclosure activity subsides, can we look forward to growth in pricing,” he said, but added that “mortgage rates remaining low and individual homebuyers cautiously re-entering the market, replacing investors, are both healthy signs for the housing market.”
In an appearance on Fox Business, Chandan Economics founder Sam Chandan elaborated on the reasons for the price declines, specifically pointing his finger at distressed properties and discount-seeking investors. He said prices would begin to rebound as the job market continues to improve and lending standards begin to relax.
The St. Louis Fed, in their Economic Synopses publication contained a research piece called Home Prices: A Case for Cautious Optimism (Hat tip: Joe Weisenthal over at BusinessInsider) that does a great job lining up 3 housing related indexes and makes the case that we aren’t through yet despite positive month over month trends of the past 6 months.
The title for this Fed research piece is simply wrong. It should be re-named: Home Prices: Not Much of a Case for Cautious Optimism.
The chart shows the Case Shiller Home Price Index, FHFA Home Price Index and NAR Housing Affordability Index of Median Household Income presented in alignment.
Here’s the problem with affordability as a measurement – it considers income, housing prices and interest rates but not the tightness of credit, which is THE story at the moment. The affordability index is significantly optimistic right now because of this gaping void over credit.
Its great to have lower prices for all those buyers only if they can get a mortgage to take advantage of the opportunity. Mortgage underwriting is very tight right now and therefore we are looking at a 3 legged kitchen table that originally had 4 legs.
Everyone is out there talking about where we are and where we seem to be going. One thing that is rather striking is the lack of spin relative to a few years ago – surprisingly refreshing.
Here’s a few notable individuals’ takes on the-state-of-where-the housingmarket-economy-is-at-right-now.
Pope Benedict XVI (Yes, the Pope): The “economy of communion.” ahem…amen.
The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centered. Today we hear much talk of ethics in the world of economy, finance and business.
Some have spoken about deleveraging. Some have told us about the shrinking of values. Others have said it’s a confidence game — as in, there isn’t any.
William H. Gross, Managing Director, PIMCO: “”Bon” or “Non” AppÃ©tit?” I always have to re-read his columns a few times to follow, because the nuances in his delivery are staggering.
Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non AppÃ©tit,” not Bon AppÃ©tit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S.
Robert Shiller, Professor of Economics, Yale University:“Bob Shiller didn’t kill the housing market”
When the June Case-Shiller figures were released, he said they showed “striking improvement in the rate of decline.” Asked to look ahead, he says, “My guess is that prices will continue to fall for a while, but at a slower pace, and then stabilize. We’ve become very speculative in our attitude toward real estate, so there could be another boom. But if so, it likely won’t happen for another five to 10 years.”
Halloween is fast approaching and I’ve already had enough candy over the past week to last another year. I’m still consistent, having avoided wearing a full costume (all appraiser jokes aside) since I was 13. I still can’t make eye contact with any of those slasher movie commercials that flood our television screens this time of year because I get the sense that something dangerous is out there…
It’s been a while since I’ve talked about or visited the monthly gauntlet of U.S. housing reports. Frankly these national oriented U.S. housing reports create more confusion than clarity. Consumers read them and apply them to their own homes despite there being no connection. But since we are fed a steady diet of them, it’s good to understand their strengths and weaknesses. Here are a few guiding principles when reading them:
Still, we freakin’ love to be spoon fed their results each month.
Here are some of the monthly reports we are smothered with:
NAR Pending Home Sale Index This is my favorite of the national reports only because it is the most current even though it is incorrectly marketed as “forward looking.” I’m not endorsing it as a fantastic resource but it’s the best of what is available. Technically it represents the market of the past month by looking at the number of contracts signed. I believe sales activity is a much better indicator of a market’s health than prices.
NAR Existing Home Sale Index This report is also one of my favorites because it has 3 moving parts: sales, inventory and prices. I like to strip away all the seasonal adjustment gobbledygook.
S&P/Case Shiller 20-City Index I think I’ve spent half of my career bashing this index even though I periodically connect with one of its authors, Nobel Laureate Robert Shiller, who is one of the smartest and nicest people around. The problem with the concept is that it was created for Wall Street to hedge single family housing, not consumers. I believe only the Vampire Squid ended up buying the rights to use the index for trading until finally the index was given away for free. The reason it’s not particularly useful? It lags the “meeting of the minds” between buyers and sellers by about 6 months and only reflects price trends, not sales. In fact, Zillow has been incredibly accurate in forecasting what CSI will show before it is published because of the reporting lag. The people that speak to the report each month simply use analogies and homespun assumptions to link it to the actual market. I find it maddening.
U.S. Census Bureau New Residential Sales (aka “New Home Sales”) The new home sale report from Census actually reflects both multi-family (apartment buildings) and single family sales. Multi-family sales have been booming in recent years while single family sales have been tepid. It’s a good report to follow but I always use the non-seasonally adjusted results.
After looking at all this charts, I’m sure many of you are reminded (if you need reminding) about the massive housing bubble of the prior decade, I highly recommend this 2008 podcast – I remember listening to it before Lehman collapsed. It’s riveting and illustrates how different things are today.
And perhaps you should consider listening to this fascinating podcast from 2 of my favorite follows on Twitter: on Foreign Policy’s Global Thinker’s Podcast: Why Won’t Regulators Rein in Big Banks?
Let’s move on from reality mode and into fantasy mode.
I’ve come to the conclusion that the $100 million single family housing market doesn’t really exist, at least not in the way it has been publicly presented. Yes there are listings of homes above the $100 million threshold, one as listed as high as $500 million, but there have only been a handful of actual sales over the past few years. There have been a parade of press releases touting new 9-figure listings entering the market, but none of them have actually sold. The idea that there are many listings priced to the stratosphere seemed to justify to sellers that this market exists and to join the party. The problem is pretty basic: these homes are not selling. By my understanding, a seller can ask whatever they wish for their home, but if it never sells, then the home was not priced to actually sell. In fact, I contend that during the past two years, this market never really existed as some sort of new unexplored territory.
There were two great articles written in the past week that addressed this market that are worth a read:
By the way, my street name is “JMillz”…
This just in…
11:30am Friday I am working from home today and just got the sad news that the building adjacent to our office building collapsed while being demolished and there was at least one fatality. Tragedy. Thankfully all of our staff got out of the building without issue. Never a dull moment in New York City.
Given this situation, I am pushing my discussion about Super Storm Sandy and interest rates to next week.
See you next week.
Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants