Matrix Blog

Showing Results for "case shiller"

[Seasonality Adjustments] are Confusing and Perhaps, Misleading

April 26, 2010 | 7:30 am |

CSIseasonalchart4-2010
[click to open announcement]

A few years ago, I was thinking about running another set of our market numbers for the NYC metro area as seasonally adjusted since that was prevalent in housing indexes such as NAR, Case Shiller, New Home Sales. However, when I spoke to several economists on how to set out to actually do this, I found there was no real standard and methodologies used were rarely disclosed. I opted not to pursue a conversion.

3-22-14jengaimage

NAR takes their monthly numbers, annualize them and then adjust for seasonality. Seems like stacking Jenga wood blocks. The smaller the base piece, the more volatile the blocks are at the top of the stack.

It felt like the reliability of the data could be diluted as a result. One of the things that happened in the NYC metro market in 2009 – seasonality ran amok post-financial crisis. Contract peak moved forward 90 days for the first time in the 25 years I’ve been tracking the market, from May-June to August-September which will then screw up year over year comparisons.

Apparently that was the feeling of S&P/Case Shiller because the wild swings in housing markets of the past several years skewed seasonality and was confusing the message.

Announcement: S&P/Case-Shiller Home Price Indices and Seasonal Adjustment

I applaud them for making a change which will result in a greater clarity of their trend analysis. Remember, the CSI index wasn’t designed for its popular use as the standard for tracking the US housing market. It was designed to be an index for investors to trade housing related financial instruments. Investors (and consumers) always need greater clarity and its great that they took action.

In some recent reports the two series have given conflicting signals, with the seasonally-adjusted series rising month-over-month and the unadjusted series declining. After reviewing the data, the S&P/Case-Shiller Home Price Index Committee believes that, for the present, the unadjusted series is a more reliable indicator and, thus, reports should focus on the year-over-year changes where seasonal shifts are not a factor. Additionally, if monthly changes are considered, the unadjusted series should be used.

Raw is better. I’m sure there are great applications of seasonality, but let’s keep the black box out of the housing market analysis.


Tags: , ,


Appraisers and Foreclosure Sales Bring Havoc to Housing Markets

January 29, 2010 | 12:30 am | | Articles |

I authored the following article for RealtyTrac which appeared on the cover of their November 2009 subscriber newsletter called Foreclosure News Report. It features a column for guest experts called “My Take.”

When Rick Sharga invited to write the article, he provided the previous issue which featured a great article by Karl Case of the Case Shiller Index and I was sold.

I hope you enjoy it.



Appraisers and Foreclosure Sales Bring Havoc to Housing Markets
By Jonathan Miller
President/CEO of Miller Samuel Inc.
11-2009

In many ways, the quality of appraisals has fallen as precipitously as many US housing markets over the past year. Just as the need for reliable asset valuation for mortgage lending and disposition has become critical (fewer data points and more distressed assets) the appraisal profession seems less equipped to handle it and users of their services seem more disconnected than ever.

The appraisal watershed moment was May 1, 2009, when the controversial agreement between Fannie Mae and New York State Attorney General Andrew Cuomo, known as the Home Valuation Code of Conduct, became effective and the long neglected and misunderstood appraisal profession finally moved to the front burner. Adopted by federal housing agencies, HVCC, or lovingly referred to by the appraiserati as “Havoc” and has created just that.

During the 2003 to 2007 credit boom, a measure of the disconnect between risk and reward became evident by the proliferation of mortgage brokers in the residential lending process. Wholesale lending boomed over this period, becoming two thirds of the source of loan business for residential mortgage origination. Mortgage brokers were able to select the appraisers for the mortgages that they sent to banks.

Despite the fact that there are reputable mortgage brokers, this relationship is a fundamental flaw in the lending process since the mortgage broker is only paid when and if the loan closes. The same lack of separation existed and still exists between rating agencies and investment banks that aggressively sought out AAA ratings for their mortgage securitization products. Rating agencies acceded to their client’s wishes in the name of generating more revenue.

As evidence of the systemic defect, appraisers who were magically able to appraise a property high enough to make the deal work despite the market value of that locale, thrived in this environment. Lenders were in “don’t ask, don’t tell” mode and they could package and sell off those mortgages to investors who didn’t seem to care about the value of the mortgage collateral either. Banks closed their appraisal review departments nationwide which had served to buffer appraisers from the bank sales functions because appraisal departments were viewed as cost centers.

The residential appraisal profession evolved into an army of “form-fillers” and “deal-enablers” as the insular protection of appraisal professionals was removed. Appraisers were subjected to enormous direct and indirect pressure from bank loan officers and mortgage brokers for results. “No play, no pay” became the silent engine driving large volumes of business to the newly empowered valuation force. The modern residential appraiser became known as the “ten-percenter” because many appraisals reported values of ten percent more than the sales price or borrower’s estimated value. They did this to give the lender more flexibility and were rewarded with more business.

HVCC now prevents mortgage brokers from ordering appraisals for mortgages where the lender plans on selling them to Fannie Mae or Freddie Mac which is a decidedly positive move towards protecting the neutrality of the appraiser. Most benefits of removing the mortgage broker from the appraisal process are lost because HVCC has enabled an unregulated institution known as appraisal management companies to push large volumes of appraisals on those who bid the lowest and turn around the reports the quickest. Stories about of out of market appraisers doing 10-12 assignments in 24 hours are increasingly common. How much market analysis is physical possible with that sort of volume?

After severing relationships with local appraisers by closing in-house appraisal departments and becoming dependent on mortgage brokers for the appraisal, banks have turned to AMC’s for the majority of their appraisal order volume for mortgage lending.

Appraisal management companies are the middlemen in the process, collecting the same or higher fee for an appraisal assignment and finding appraisers who will work for wages as low as half the prevailing market rate who need to complete assignments in one-fifth the typical turnaround time. You can see how this leads to the reduction in reliability.

The appraisal profession therefore remains an important component in the systemic breakdown of the mortgage lending process and is part of the reason why we are seeing 300,000 foreclosures per month.

The National Association of Realtors and The National Association of Home Builders were among the first organizations to notice the growing problem of “low appraisals”. The dramatic deterioration in appraisal quality swung the valuation bias from high to low. The low valuation bias does not refer to declining housing market conditions. Despite mortgage lending being an important part of their business, many banks aren’t thrilled to provide mortgages in declining housing markets with rising unemployment and looming losses in commercial real estate, auto loans, credit cards and others. Low valuations have essentially been encouraged by rewarding those very appraisers with more assignments. Think of the low bias in valuation as informal risk management. The caliber and condition of the appraisal environment had deteriorated so rapidly to the point where it may now be slowing the recovery of the housing market.

One of the criticisms of appraisers today is that they are using comparable sales commonly referred to as “comps” that include foreclosure sales. Are these sales an arm’s length transaction between a fully informed buyer and seller is problematic at best. While this is a valid concern, the problem often pertains to the actual or perceived condition of the foreclosure sales and their respective marketing times.

Often foreclosure properties are inferior in condition to non-foreclosure properties because of the financial distress of the prior owner. The property was likely in disrepair leading up to foreclosure and may contain hidden defects. Banks are managing the properties that they hold but only as a minimum by keeping them from deteriorating in condition.

In many cases, foreclosure sales are marketed more quickly than competing sales. The lender is not interested in being a landlord and wants to recoup the mortgage amount as soon as possible. Often referred to as quicksale value, foreclosure listings can be priced to sell faster than normal marketing times, typically in 60 to 90 days.

The idea that foreclosure sales are priced lower than non-foreclosure properties is usually confused with the disparity in condition and marketing times and those reasons therefore are thought to invalidate them for use as comps by appraisers.

Foreclosure sales can be used as comps but the issue is really more about how those comps are adjusted for their differing amenities.

If two listings in the same neighborhood are essentially identical in physical characteristics like square footage, style, number of bedrooms, and one is a foreclosure property, then the foreclosure listing price will often set the market for that type of property. In many cases, the lower price that foreclosure sales establish are a function of difference in condition or the fact that the bank wishes to sell faster than market conditions will normally allow.

A foreclosure listing competes with non-foreclosure sales and can impact the values of surrounding homes. This becomes a powerful factor in influencing housing trends. If large portion of a neighborhood is comprised of recent closed foreclosure sales and active foreclosure listings, then guess what? That’s the market.

Throw in a form-filler mentality enabled by HVCC and differences such as condition, marketing time, market concentration and trends are often not considered in the appraisal, resulting in inaccurate valuations. As a market phenomenon, the lower caliber of appraisers has unfairly restricted the flow of sales activity, impeding the housing recovery nationwide.

In response to the HVCC backlash, the House Financial Services Committee added an amendment to the Consumer Financial Protection Agency Act HR 3126 on October 21st which among other things, wants all federal agencies to start accepting appraisals ordered through mortgage brokers in order to save the consumer money.

If this amendment is adopted by the US House of Representatives and US Senate and becomes law, its deja vu all over again. The Appraisal Institute, in their rightful obsession with getting rid of HVCC, has erred in viewing such an amendment as a victory for consumers. One of the reasons HVCC was established was in response to the problems created by the relationship between appraisers and mortgage brokers. Unfortunately, by solving one problem, it created other problems and returning to the ways of old is a giant step backwards.

We are in the midst of the greatest credit crunch since the Great Depression and yet few seem to understand the importance of neutral valuation of collateral so banks can make informed lending decisions. Appraisers need to be competent enough to make informed decisions about whether foreclosures sales are properly used comps. For the time being, many are not.


Tags: , , , , , ,


[Altos Research/Real IQ] November 2009: Listing Prices Down In 25 of 26 markets

December 8, 2009 | 11:00 pm |

Altos Research and Real IQ released their Real-Time Housing Market Update report which provides a monthly snapshot of the 10-City Composite Index. It is along the same lines (no pun intended) as the S&P/Case Shiller index to which they state their index is closely correlated to. The report summarizes metrics associated with active residential property listings to present the only real-time view of the housing market.

Michael Simonsen, the CEO & Co-Founder Altos Research has been a guest on my podcast and I hold both he and his firm in high regard.

In November, both listing prices and listing inventory generally declined.

Some of the key findings:

  • The Altos Research 10-City Composite Price was down by 0.4% in November and 0.8% during the most recent three-month period.
  • The Composite effectively bottomed out in January at $470,017 and climbed throughout the first half of the year to $509,030 in July before returning to a gradual downward trend. Prices are likely to continue showing modest declines throughout the seasonally weak fall and winter months of 2009.
  • Asking prices increased in just one of 26 markets – Miami. The previously strong California markets all showed price declines during November.

The report suggests weak price trends over the winter, similar to the warnings shared by Case-Shiller and NAR.

Note: This was my first blog post done at 34,000 feet.


Tags:


[Seasonalized?, Annualized?] Pending Home Sales Index Up 8th Consecutive Month

November 2, 2009 | 7:00 pm | |

The National Association of Realtors released its pending home sale index results from September and the results were good as expected:

The Pending Home Sales Index, a forward-looking* indicator based on contracts signed in September, rose 6.1 percent to 110.1 from a reading of 103.8 in August, and is 21.2 percent higher than September 2008 when it stood at 90.9. The gain from a year ago is the largest annual increase on record, and the index is at the highest level since December 2006 when it was 112.8.

*Note: only forward looking in the context of closed sales.

Yun describes the actual contract activity as less than August but if adjusted for seasonality and annualize, its way up. Extrapolating like this makes me uncomfortable – yes its better news, but not with a solid foundation. Especially the inference that this is a continuing trend.

The uptick in activity was explained as a last minute rush to take advantage of the first time buyer’s tax credit. While its beginning to look like the tax credit will be renewed with income limits expanded, I suspect sales would fall sharply if it wasn’t. Stimulus is designed to prime the pump but it doesn’t feel like prime yet, especially over the next month or two when Case Shiller goes negative.


Tags: , , ,


[NAR] Pending Home Sales Up 6.4%, 7 M-O-M Increases

October 1, 2009 | 1:03 pm | |

Contract activity another way to track housing trends although it’s reliability is fraught with risk since it is a much smaller data set and therefore subject to skew, especially on a local level. However, on a national level (as far as that goes) it is the only index of this kind we have.

From Reuters/NYT:

Pending sales of existing U.S. homes rose sharply in August, for a seventh consecutive month of gains, reaching the highest since March 2007, data from a real estate trade group showed on Thursday.

And the NAR press release:

Pending home sales have increased for seven straight months, the longest in the series of the index which began in 2001, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in August, rose 6.4 percent to 103.8 from a reading of 97.6 in July, and is 12.4 percent above August 2008 when it was 92.4. The index is at the highest level since March 2007 when it was 104.5.

[Recommendation to NAR] – contracts are not “forward looking” but rather they are “current looking.” Housing futures indexes like Case Shiller are designed to be “forward looking.” PHSI is forward looking as far as it relates to closed sales but not as a way to predict the future market trend in real terms.

Here are the raw PHSI data points.

Seven months of m-o-m seasonally adjusted contract sales activity is certainly encouraging, especially because it is an index of sales rather than prices. Honestly, in light of what is happening on the foreclosure front, I am not sure what this run of good news actually infers. br clear=”all”>

Tags: , , , ,


[1987-09] Median Household Income v. Housing Values

July 27, 2009 | 11:31 pm |

I was searching for income trends as they relate to housing and stumbled on this clip at designing better futures. A very clever time lapse presentation of household income versus Case Shiller median housing prices. Love it.

If you like this, he’s got another one that tracks S&P 500 rolling returns movie 1881- 2009 .


Tags:


Wondering If The Negative Gravy Train Has Left The Station?

May 6, 2009 | 12:34 am | |

You’ve got to admire people that go out on a limb and call a market as a contrarian and turn out to be right. It’s a lucrative opportunity for those that are able to monetize it.

There is a lot of discussion lately about a slower pace of decline and that the end may be within the few years. The recession is expected to end at the end of this year and unemployment is expected to top out in about 18 months. In other words, there is plenty of room in the tank for financial opportunities for negativism.

Some notables who seem to continue to do well are:

The Housing Bubble Blog and others like it were screaming that the bubble was going to burst. They were right, despite all efforts by NAR to keep them in check. Ben Jones is one of the most prolific content posters and has the gold standard blog name for the subject. I’ve linked out and have been checking in with his work since late 2005. Although he is a free lance writer, his content appears to be collected by copying full articles from primarily newspapers and magazines around the country – with little or no analysis. Yet he’s consistent and finds a broad array of the key articles of the day. He still attracts hundreds of commenters on every post and all kinds of theories and ideas are shared. He takes donations and has banner ads. He’s created a grass roots feel.

But site traffic is down by more than half over the past year. Are people tiring of the negative?

Professor Robert Shiller, who is a very nice person and has published some terrific work on the wealth effect, economic psychology to name a few, was able to capitalize on the contrarian perspective with his book Irrational Exuberance and the subsequent update to include housing. He called the NASDAQ and housing market bubble correctly and has since released two additional books.

According to Shiller we are looking directly in the face of an enormous “speculative bubble” and the question is not whether stock prices will fall but when!

He tirelessly promoted the S&P/Case Shiller Home Price Index which has become the defacto standard for housing indexes by virtually all news outlets and economists. Despite his efforts and those of S&P, the trading markets for which the index was created, has yet to gain significant traction.

Nouriel Roubini, economics professor at NYU who is also known as Dr. Doom, has been spot on in his calling of the housing bubble. He was so blunt and negative that he quickly gained many detractors.

By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog.

I’ve heard his consulting firm RGE Monitor is doing well but I have no way to confirm.

When he spoke at a convention in New York, several people quipped to me that they needed to jump out of a window because the world was ending.

Roubini was known to be a perpetual pessimist, what economists call a “permabear.”

He’s been hard to find fault with, and he fights with Jim Cramer calling him a buffoon. His recent opinion piece in the WSJ called We Can’t Subsidize the Banks Forever was strong, yet was also called to task for misquoting the IMF.

However this info was just released which makes Roubini right once again::

Regulators have told Bank of America that the company needs to raise roughly $35 billion in capital based on results of the government’s stress tests, according to people familiar with the situation.

Thus, I answered my question. The gravy train for pessimism is still in the station.


Tags: , ,


[FOMC Parse] Nowhere To Go, Although Badness Troughs

April 30, 2009 | 3:44 pm | |

The Federal Open Market Committee cut the federal funds rate another 25 basis points to 2%. The WSJ breaks out the announcment FOMC statement in a feature called Parsing The Fed.

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

With talk of green shoots and everyone digging hard to find silver linings, the Fed announcement was consistent with other news as of late. In other words:

Things are getting worse but not as fast as before.

I’ll take that.

GDP was -6.1% however consumer consumption is up since January which suggests this may be the trough of its decline. The recent Case Shiller index results brought similar comments about housing, that the worst may be over but demand and prices are still falling and have more to go.


Tags:


[Selling MOM Out] Month Over Month, ‘Cause It Looks Better

March 25, 2009 | 12:13 am |

Ok so we see an endless parade of housing stats (guilty as charged) and lately the news seems to be better, no?

The Federal Housing Finance Agency released their stats (covering conventional mortgage data – sub $729k mortgages) – They used a month over month headline:

U.S. Monthly House Price Index Estimates 1.7 Percent Price Increase From December to January

U.S. home prices rose 1.7 percent on a seasonally-adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. December’s previously reported 0.1 percent increase was revised to a 0.2 percent decline. For the 12 months ending in January, U.S. prices fell 6.3 percent. The U.S. index is 9.6 percent below its April 2007 peak.

Jan-Feb % change spiked last year and did the same this year, but somewhat higher. Here’s a look by Justin Fox at Curious Capital.

However, quarterly showed a large fall off in 4Q 08 so it will be interesting to see how Q1 09 shakes out.

The National Association of Realtors released their Existing Home Sale Report yesterday. They used a month over month headline:

Existing-Home Sales Rise In February

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 5.1 percent to a seasonally adjusted annual rate1 of 4.72 million units in February from a pace of 4.49 million units in January, but are 4.6 percent below the 4.95 million-unit level in February 2008. Seasonal adjustment factors are more volatile in winter months, but sales rates over the past few months show dampened sales activity.

In other words, existing home sales are lower than last year. However, Calculated Risk and Chris Martenson counters NAR spin showing that the 5.1% increase is pretty ho-hum.

New Home Sales stats are being released Wednesday and consensus is a pace of 300k down from 309k last month.


The S&P/Case Shiller Indices are being released in a week (March 31) but not turn is predicted.

Conclusion?
What does all of this mean? It means that there remains enormous spin from trade groups and government agencies. It means that consumers need to be skeptical of month over month gains because of seasonality.

Is there a possibility that housing is improving nationally? Not really but hope is a powerful thing that I try to consider month to month.


Tags: , , , ,


[Solid Puff Piece] Goldman Research Note Clouds Manhattan

January 13, 2009 | 1:43 am | |

On Thursday there was a widely viewed and discussed research letter by Goldman Sachs covering the Manhattan housing market. Lockhart Steele at Curbed first reported it on Thursday, followed by the WSJ on Friday.

I thought Lock broke it down thoroughly — Curbed style — and there was nothing more to it. Later, I got about a bunch of emails asking for my thoughts on the research note so I thought I would take another look (since my work is part of their commentary).

I placed the full text of their research note at the bottom of this post.

Frankly, I thought the Goldman research letter was surprisingly thin, with weak logic and a bit self-serving since Goldman was the first licensee of the S&P/Case-Shiller Home Price Indices.

Some of my observations about their observations:

  • Goldman predicts housing prices will drop a total of 35% to 44% to late 1990’s levels. (Since prices have already fallen 20%, that means we are halfway there.)
  • Goldman uses the phrase “these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn” twice in this paper. Gotta love boilerplate!
  • Goldman refers to me as an analyst (dammit Jim, I’m an appraiser not an analyst! a la “Bones” on Star Trek) as in “one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December.”
  • Goldman criticizes the “brokerage reports” for not considering price per square foot since the firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. Of course the report I prepare as well as my competitors’ reports all use price per square foot as a basic price metric. I was the first to do this many years ago for the co-op market.
  • Goldman alludes to one of the research companies cited as having only one year of price per square foot data. Of course Goldman forgot to mention our reports contain price per square foot data going back to 1989 broken out quarterly and annually by number of bedrooms (size) and property type (co-op, condo and 1-5 family).
  • Goldman relies on only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices. This is actually a logical point. Since about 38.3% (in 4Q08) of condo sales were from new developments, using them as a basis of establishing a trend would reflect market conditions 12-18 months ago when the typical contract was signed. Any report or index that does not extract new development from the condo sales data can be as much as 12-18 months behind the market. I have found re-sale activity to be more reliable for establishing condo price trends which is something that can be captured using the CSI repeat sales methodology, despite many reservations that I have.
  • CSI continues to omit co-ops from its product suite, which represents about 75% of the housing stock in Manhattan. Which begs the question: “How do you track a housing market without 75% of the housing stock considered?”
  • Goldman uses the CSI index (which covers all of New York City, not the individual boroughs) yet analyzes income in Manhattan to establish ratios for affordability. This is perplexing to me since prices in the outer boroughs are half their equivalent in Manhattan. With the way this part was written, I get the feeling that using the CSI index was simply easier to plug into their ratios.

In short, I see this research note is more of a “puff piece” using the “faith and credit” of Goldman’s brand to hump the new Case Shiller condo index which was why I didn’t pay much attention to the Goldman report when initially released. I understand it is not a white paper, nor was it meant to be backed up by lots of footnotes and appendices. However, the fact that it was released by the gold standard of (former) investment banks, is a bit disappointing.

Here it the research note text:

We use the recently introduced S&P/Case-Shiller index for condominium prices to assess the valuation of the New York apartment market. Although housing market valuation typically has little predictive value for the near term, it is useful for anticipating longer-term moves, especially when prices are far away from equilibrium.

Indeed, New York apartment prices are very high relative to the observable fundamentals. Using three alternative yardsticks—price/rent, price/income, and affordability —we find that prices would need to decline by 35%-44% to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom.

The uncertainty is substantial. On the one hand, the picture would worsen further if per-capita incomes in Manhattan returned from their current level of 3 times the national norm toward the pre-1990s average of 2 times the national norm. On the other hand, it would brighten somewhat if jumbo mortgage rates converged toward conforming rates, perhaps because of a broadening of the Fed’s support measures. In addition, societal and demographic changes could also help, though these types of arguments are difficult to quantify and are often heard just prior to a real estate market downturn.

Following a decade-long boom, activity in the New York City apartment market is now slowing sharply. The sales reports for the fourth quarter of 2008 released on Monday by two of the largest New York real estate brokers—the Corcoran Group and Prudential Douglas Elliman—suggest that sales dropped by 25%-30% from the fourth quarter of 2007 (see “Striking Declines Seen in Manhattan Real Estate Market,” New York Times, January 6, 2009, page A20). Although the prices of closed sales were little changed from a year earlier, one analyst estimated that the prices of apartments that were under contract but had not yet closed fell by 20% from August to December. Moreover, it is well known that prices lag sales activity in the housing market, so most observers agree that both contract and closing prices are likely to decline in the near term.

Information on sales and price momentum is very helpful for predicting near-term moves in the real estate market. But in order to gauge the longer-term outlook, it is better to look at fundamental valuation indicators, such as the level of prices relative to rents or incomes, either directly or adjusted by mortgage interest rates. These types of variables don’t have much predictive power over the near term, but they start to become much more powerful at horizons longer than 1-2 years.

Until recently a fundamental analysis of the New York apartment market was hampered by the lack of high-quality price data. The various brokerage firms publish mean and median prices for both co-ops and condos on a quarterly basis, but these are difficult to interpret due to significant changes over time in the size and quality of apartments being sold. In addition, research firm Radar Logic, Inc., publishes a “price per square foot” series for the New York condo market. However, there is only a year’s worth of history, and changes in the average quality of homes sold can still distort the data even though the Radar Logic approach does control for variations in size.

But the data situation has improved dramatically with the recent broadening of the S&P/Case-Shiller (CS) repeat sales home price index to cover five of the nation’s largest condominium markets, including New York. These indexes stretch back to 1995—not as far as we would like but much better than what is available currently—and they adjust for changes in both size and quality of the condos by using only matched price observations involving successive transactions in the same condominium for estimating the overall change in prices.

Admittedly, a repeat sales index does not perfectly adjust for quality changes. In theory, the bias could work in either direction. On the one hand, wear and tear will reduce the value of a given condominium over time if the owner does not look after the property well. On the other hand, upgrades such as new flooring or a nicer kitchen may raise the value. While the CS index seeks to eliminate the influence of these factors by downweighting price change observations that are far out of line with local comparables, this is unlikely to eliminate all sources of bias. Still, we believe that a repeat sales index is far superior to the available alternatives for the purpose of measures changes in underlying real estate prices.

In analyzing the data, it is useful to look first at the raw numbers for New York condo prices. As shown in the table below, nominal prices tripled from 1995 to 2006, went essentially sideways in 2007, and have declined by about 3% in 2008. The stability since 2005 is somewhat at odds with reports from the New York real estate brokers that still show meaningful gains in mean and median prices over this period. However, we suspect that the apparent contrast is resolved by a shift in transactions toward larger and higher-quality apartments over this period, which would increase the mean and median price figures but leave the CS index unaffected.

Index

(Jan 2000=100)

Oct-95 75.3

Oct-96 75.4

Oct-97 80.6

Oct-98 89.2

Oct-99 97.5

Oct-00 111.3

Oct-01 126.7

Oct-02 144.3

Oct-03 161.2

Oct-04 188.8

Oct-05 222.6

Oct-06 227.4

Oct-07 226.7

Oct-08 221.1

Source: Standard and Poor’s.

But are the price gains sustainable? To assess this, we focus on three primary valuation measures:

  1. Price/rent ratio. We divide the CS index by the Bureau of Labor Statistics’ index of owners’ equivalent rent for the New York metropolitan area, and index the resulting ratio to 100 for the average of the 1995-1999 period. We choose this base period because it mostly precedes the recent boom but covers a period when the quality of life in Manhattan had already improved significantly from the 1980s and early 1990s. Hence, a return to the average 1995-1999 valuation level might seem like a fairly neutral assumption.

  2. Price/income ratio. We divide the CS index by the Bureau of Economic Analysis’ measure of personal income per capita, and again index the resulting ratio to 100 for 1995-1999. Although the condo price index covers the entire New York metro area, we use an income series for the County of New York (i.e., Manhattan) rather than the entire metro area. The New York condo market is quite concentrated in Manhattan; this concentration is particularly pronounced in the CS index because it is weighted by value rather than units and therefore typically assigns a much greater weight to condo sales on Fifth Avenue than in Queens. (Note that New York County income is only available through 2006; we somewhat optimistically assume that it has grown at the average national rate since then.)

  3. Affordability. Using a standard mortgage calculator and assuming both a jumbo mortgage and a 30-year maturity, we calculate (an index of) the share of Manhattan per-capita income spent on condo mortgage payments at the current level of the CS index and the current level of jumbo mortgage rates. We again index the resulting ratio to 100 for 1995-1999.

The table below shows what all three of our indicators say about the current valuation level, as of October 2008. We focus on the percentage decline in nominal condo prices that would be required to bring our three valuation measures back to the 1995-1999 average, assuming no changes in other inputs such as rents, incomes, and mortgage rates.

Price/Rent Price/Income Affordability

Required Decline* -44% -37% -35%

*In order to return to 1995-1999 valuation levels.

Source: Our calculations. See text for additional explanations.

Our indicators suggest that New York condo prices would need to fall by between 35% and 44% to return to a neutral valuation level, depending on the valuation measure we choose. Under the (admittedly unrealistic) assumption that prices decline by the same percentage in each market segment, this type of drop would imply that a 1-bedroom condo whose price currently averages roughly $800,000 would decline to $480,000; a 2-bedroom condo would decline from $1.7 million to $1 million; and a 3-bedroom condo would decline from $3 million to $1.8 million. (All these figures are approximate and are loosely based on the brokerage firms’ fourth-quarter reports.)

Since economies typically grow over time, one would normally hesitate to predict that “mean reversion” in a price/income or price/rent ratio should occur entirely via a decline in prices rather than an increase in incomes or rents. In our case, however, the assumption of flat nominal incomes and rents does not seem excessively pessimistic. In fact, it is quite possible that nominal Manhattan incomes will decline for a while. Such a nominal decline would be extremely unusual at the national level but did occur in Manhattan following the 2001 recession, which was much less severe than the downturn we are currently seeing.

In fact, it is instructive to consider the potential implications of a return of relative Manhattan incomes toward the national norm prevailing before the Wall Street boom of the past two decades, either because of pay cuts in the financial industry or because of a possible out-migration of affluent individuals. From 1969 to 1986, Manhattan per-capita income averaged 2 times the national average, with no clear trend. Over the next two decades, however, it grew to 3 times the national average. If incomes fell back to the pre-1986 level of 2 times the national average—and if national per capita income remained unchanged—prices would need to fall as much as 58% to return to the 1995-1999 price/income ratio. (The 58% drop is calculated as the 37% drop shown in the table assuming constant income, plus the 33% drop in per capita incomes, minus a term for negative compounding.)

So is there any hope for the New York apartment market? Apart from a dramatic turnaround in the city’s economic fortunes, the most plausible story is a drop in jumbo mortgage rates. So far, jumbo rates have not benefited much from the recent decline in mortgage rates, but this could change if the Fed (presumably in conjunction with the Treasury) decided in the course of 2009 to broaden its support from the conforming market to the private-label mortgage market. To make an extreme assumption, if the jumbo mortgage rate fell from the current 7% to 5%, this would reduce the “required” price decline from 35% to 19%. Of course, this assumes that affordability is the only measure that matters for home prices and there is no role for the “raw” price/rent or price/income ratio, and that Manhattan incomes stay at 3 times the national average.

In addition, it could be that societal and demographic changes will keep New York apartment valuations above the levels that prevailed in earlier periods. For example, one might argue that the memory of high crime rates was still fresh enough in 1995-1999 to make this period an excessively pessimistic benchmark. If crime stays low during the current economic downturn, perhaps Manhattan real estate will retain its higher valuation in coming years. Alternatively, one might argue that the aging of the baby boomers will continue to support the New York market as “empty nesters” want to live closer to the city’s attractions. These types of arguments are difficult to quantify and are often heard just prior to the start of a real estate downturn, but they do underscore that our analysis of the observable data on prices, rents, incomes, and interest rates only provides a very partial view of the New York apartment market.

Source: Goldman Sachs

Tags: , , , , , , , , ,


[Bullish In Technicolor] Housing Prices Show More Weakness

August 26, 2008 | 11:38 am | |

It’s 48 hours of market report nirvana!

Guess what?

  1. Home prices are falling. [shocking]

  2. And prices during the spring market didn’t fall as much as the winter. [informative]

This is all very new and helpful. [sarcasm]

Here’s a recap

Here’s a thought. Mortgages are more expensive and less accessible than two years ago. Until that changes, I wouldn’t expect real, measured improvement. Improvement will come eventually. Let’s deal with the situation at hand rather than all the focus of calling the turnaround correctly.

What especially drives me crazy has been the viewpoint that things are getting better based on rising activity and/or prices in the spring in certain markets. It’s called “seasonality.”


Tags: , , ,


[Smoking Gun Crack] Signs Of Housing Recovery

July 14, 2008 | 10:15 pm | |

In a lapse of judgement, poor writing or an irrational need to be contrarian, the normally solid publication Barrons (I subscribe) drops the ball on their cover story:

Bottom’s Up: This Real-Estate Rout May Be Short-Lived

If IndyMac, Fannie and Freddie didn’t steal the headlines over the weekend, I wonder if this article would ever made it to print.

The article suggests housing is moving toward recovery based on a review of recent data:

  1. NAR exisitng homes have a 10.8 month supply in May versus a 11.2 month supply in April (ahem: Seasonality occurs in rising and falling market. Home sales rise in the spring.)

  2. Case Shiller showed prices rose in 8 of 20 housing markets in April, and the pace of decline is slowing in many of the cities surveyed. (see no. 1)

  3. Treasury Secretary Paulson recently said: “”we are well into the adjustment process.” (This is a political move to allay investors – other than that, what does this statement actually mean?)

  4. David Blitzer, chairman of the S&P Index Committee indicated the media was only interested in the “…bad year-over-year number.” (blame the media observation – see no. 1.)

  5. Pending Congressional bailout. FHA will reposition $300M in subprime mortgages. (For perspective, Fannie and Freddie have 5 trillion in outstanding mortgages, how does this save the market? It’s a drop in the bucket).

  6. Fannie and Freddie may be taken over by the government is a good thing. (no it’s not)

  7. A million unit drop in housing starts has signified the end of the last 3 housing corrections. (none of those period saw anything close to the speculation and poor lending practices seen the recent boom – no lessons learned by history here).

  8. Affordability (via price/income) has improved with price declines. (The rationalization for increased affordability is pretty silly since underwriting standards are much tighter. In other words, if your credit score and salary didn’t change from last year, and your home dropped in value, your buying power is probably much lower. In other words, affordability did not increase despite the mechanical calculations to the contrary).

  9. NAR reports 2% increase in co-op. condo and townhouses from April to May. (See no. 1)

  10. NAR economist Lawrence Yun is actually relied on in this article. (He called the credit crunch temporary last August and the housing market would return to normal in the fall.)

  11. Mortgage market weakness is front end loaded with foreclosures and defaults. (In theory the bad is behind us – for the life of me, I can’t understand the rationale. How does this mean housing is poised for a turn if the scope of the credit crunch is unprecedented?)

Good grief.


Tags: , , , , , , , ,