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[Achooo!] Proving Once Again That Real Estate Is Global, Not Local

May 23, 2008 | 9:54 am | Radio |

Ok, not really.

Last month I did an interview on BBC Radio and the producer said the interview was based on the old adage that “when America sneezes, the world catches a cold.”

There was a pretty interesting article in The Economist, which has been a housing bear since 2003, called Structural cracks: The pain in Spain falls mainly on Mr Drains

Other than trying to get the inner meaning of the title, the chart clearly shows that the countries on the list are performing differently or are in different phases of their respective cycles.

So in a global sense, housing is local after all?

It is, but there are a heck of a lot of local markets that comprise the global housing market.

Some locales that stood out to me:

Singapore and Hong Kong are doing well lately while Japan and Germany are not.

Both Spain and Ireland have parallels with the American housing market, where the inventory of unsold homes has hit a 20-year high, according to Capital Economics. There the pace of price decline, as measured by the S&P/Case-Shiller indices, has been accelerating.

Monetary policy is changing across the globe, weakening buying power like it is in the US. Because (insert tired phrase here:) when America sneezes, the world catches a cold.

Or something along those lines…

If house-price weakness does spread more widely, there may be important economic consequences. There is plenty of debate about the size of the “wealth effect” of higher property prices on consumer demand. But it will hardly help that fuel and food prices are soaring at the very moment when the value of bricks and mortar looks about to sag.


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There Is No National Housing Market

December 2, 2007 | 1:47 am | Milestones |

The use of national housing statistics has been a key source of confusion for consumers, real estate brokers, lenders, media, financial markets and government agencies among others. The statistics are often applied to local markets and properties. The reliance on these numbers for ground level use has a pet peeve of mine for many years.

When Radar Logic rolled out its first RPX Monthly Housing Report on October 2, 2007, we made sure that the focus was geographical housing patterns.

The report effort was based on the premise that there is no national housing market; rather, each of the MSAs, while having some economic influences in common like mortgage rates, is influenced primarily by local conditions.

I was encouraged by the release of the latest batch of market reports this week that have begun to make this point more clear in their press releases. When the market was rising, press release jargon tended to be much more focused on national numbers. I suspect we will see a shift in orientation since this is really a false premise.

Office Of Housing Enterprise Oversight [OFHEO] – November 29, 2007

The figures were released today by OFHEO Director James B. Lockhart, as part of the quarterly report analyzing housing price appreciation trends.

“While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country,” said Lockhart. “Indeed, in the third quarter, more than 20 states experienced price declines and, in some cases, those declines are substantial.

National Association of Realtors – November 28, 2007

NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif., emphasized that all real estate is local. “Keep in mind that home prices are up in 93 out of 150 metro areas, and there is a lot of confusion in the market from reports about national data. Broadly speaking, home prices in most areas are up modestly or fairly stable,” he said. “Areas with population or job growth are seeing the strongest home price gains.”

National Association of Home Builders [NAHB] – November 27, 2007

Their comments on the release of the S&P/Case-Shiller numbers this month…

“We need to put these numbers in proper historical context by analyzing them over the long term, rather than in one-year increments,” said Brian Catalde, president of the National Association of Home Builders (NAHB) and a home builder from El Segundo, Calif. “The statistics released today also reaffirm that all housing markets are local, and conditions in them are dictated by the local economy and job market.




UPDATE: Economist Humor: A friend of mine, who happens to be a well respected economist, mentioned to me last week:

…there are 3 kinds of economists: the kind that can count and the kind that can’t.


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Repeat Sales, Fancy Math and Shaking The Tree

September 20, 2007 | 12:26 pm | | Public |

There was a great Page One article in the New York Sun by Bradley Hope today Amid Market Uncertainty, a New Hedge that covers Radar Logic’s property derivative product RPX. (note: I head up Radar Logic Research). As a good reporter should, Bradley gathered a quote from Karl Case, one of the creators of another property index, the S&P/Case-Shiller® Home Price Indices that has been available for more than a year.

While I have met the widely quoted Yale economist Robert Shiller and recently appeared with him at Lincoln Center at the Real Deal New Development Forum, I have not had the pleasure of meeting his longtime associate, Karl Case.

Mr. Case, who has been involved with research into real estate indices, said the RPX caters more toward dealers, but includes more “unpredictable random error” by using complex mathematics to calculate the values on a daily basis.

“They add fancy math, but they don’t add data,” he said.

Coming from a respected economist, I am surprised by his lack of understanding of RPX, and for making this type of comment, especially when RPX methodology is transparent and fully available on the Radar Logic web site.

Professor Case has really got it backwards. RPX has added data which is specifically excluded from the S&P/Case-Shiller® Home Price Indices:

  • Condos – “Condominiums and co-ops are specifically excluded” (from CSI)
  • New construction – “new construction is excluded” (from CSI)

It is fair to say that the real estate markets in the metro areas covered in their index have been significantly influenced by condo and new construction activity.

In addition:

  • Foreclosures – “subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs” (from CSI) How is this determined?

As far as the fancy math comment goes, all I can say is: “good grief.” The RPX proprietary methodology was created by an affiliate of Radar Logic, Ventana Systems who for more than 20 years have been creating and deploying robust, comprehensive models of a complex environment for strategic visibility and control and whose current projects include modeling the national airspace system, research and development productivity, national economy, energy, climate, disease epidemiology and intervention. Ventana is run by the brightest people I have ever met.

Stay tuned!


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[Matrix Zeppelin] Negative carry, when they crashed, risque calender, 212, buyers quibble, explain to the bank, WAY more, Repeat sales, slippage, derivatives

April 6, 2007 | 8:57 am | |


Well, the Matrix Zeppelin has been in storage lately, its owners trying to figure out whether to rent or buy a garage for it. In the meantime, Matrix readers have been busy trying to touch up their photos of the market, trying to decide whether it looks better or worse than before:

  • We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?

  • According to Steven Roach, the dot com stocks only made up about 6% of the markets when they crashed, but sub-primes made up about 10% of last years real estate market.

  • As a Realtor and a professional photo retoucher/photographer, I would NEVER alter a photograph in such a way that it could be perceived as misrepresentation. I am very careful about such things. In the past I have adjusted the color, contrast, brightness etc. (say if I took the image on a cloudy day). I have removed trash cans from front yards, laundry and toys from bedroom floors, even a risque calender or two from office walls…but never ever have I given the impression that the house was in better repair, the yard was more manicured or the neighborhood was more desireable. We have to be very careful about doing anything that could come back and get us later.

  • I live and work in 10021 and would hate to see any changes. It’s not status (I swear)it’s just that as I age (mature?) I find myself less and less tolerant of these kinds of upheaval. My home and office phones are 212 (I rule!) but my cell has gone from a 646 to the foreign sounding 347. An agent I work with, an otherwise fine gentleman, has a 212 cell number. he is hated office wide for this.

  • As a broker when dealing with condos i use the square footage given in the offering plan and then say approximately. Reasoning being the offering plan to me is the official number and as you said everyone else who comes in to measure will get a different number. When buyers quibble my response is that all square footage is not the same or more clearly 1000 sf in one property will seem larger than 1000 sf in another. It comes down to usable space, how the space presents etc and then, what are you buying square footage or a home?

  • Whenever I appraise a condo, I always measure. Most times the official measurement is very close. I presume this is because the architect has to certify the plans…Nonetheless, I generally use the official measurement when doing the sales comparison approach. Why? Because that is what the typical buyer will consider. But I always include both measurements and explain to the bank the reason for the discrepancy (e.g., they included exterior walls, different method).

  • You fail to realize that “homeownership” can only continue if employment does. What it sounds like you’re really saying is “I have a job and a house so I don’t care about other people.” Having higher employment is WAY more important for this country than high home “ownership.” People can always rent a place to live, but it’s more important that they be able to eat and clothe themselves than buy a house.

  • Repeat sales method takes each sale and compares the price paid versus its prior sale and then you combine the change in aggregate over a specific period – shiller apparently adjusts or factors for changes in the house – ie an extension. I’m not sure how this is done and it won’t consider an extensive renovation, for example nor does this index consider foreclosures or new development (its the first time sold so there is no repeat).

  • Case-Shiller picks up foreclosure sales between the bank and the market, not the mortgagee and the lender. From the methodology paper: “… Although identified foreclosure transfers are excluded during the pairing process, subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs.” New developments are not included because the methodology requires at least two recorded transactions prior to admmission into the index. Since Case-Shiller and OFHEO are repeat sales based indexes, there is “slippage” in the sense that untraded iventory is not absorbed in the indexes. (As correctly noted above.) If there was an appraisal method, then a value could be guess-timated. However, over the long run, all these properties will eventually transact and will then be accounted for in the indexes.

  • There is a Case-Shiller index that tracks national housing prices. The index symbol is SPCSUSA. It updates quarterly instead of monthly. It is being traded as a forward over-the-counter (OTC), not as a listed futures contract. The forward market for expiration February 2010 is -12% bid, -4.25% offered. The derivatives market views nationwide housing prices as expressed by this Case-Shiller index as substantially lower looking out three years.


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Housing Futures Need To Be On A High Enough Frequency To Be Heard

July 18, 2006 | 11:56 am | |

At Matrix, I have been following the CME Housing Indexes that are based on the work of the noted economist Robert Shiller and others. Bob has been discussing this in various venues around the country as a way for the investors to hedge their bets.

In Days of Housing Futures Past [TheStreet.com] Howard Simons makes the case that these housing contracts, based on ‘old’ data and with sizable size issues, aren’t such a good idea. Its a really well thought out article.

Here’s why:

  • Past performance may not predict future results
  • All futures markets are based on the principle of indifference.
  • Futures markets also have a large measure of insurance built into them.

This is not the case with housing futures. Each of the contracts is based on the S&P/Case-Shiller (CSI) home price indices. They cover metropolitan areas of Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Las Vegas, Denver and Los Angeles, as well as a composite national index. That in itself does not present a problem; we have close to 25 years of experience trading index-based, cash-settled futures on things such as stock indices.

Frequency is the problem:

Unlike a stock index that is refreshed several times a minute, the CSI indices are released at 1:15 p.m. Central Standard Time on the last Tuesday of every calendar month. The release is of necessity for data collected for previous months. For example, the August report will cover the data collected for April, May and June in each reporting region.

Housing futures are being marketed as an indirect way of playing rising long-term interest rates. The answer is simple: If you think rates are going higher, sell bond futures or something similar. They are a direct play on interest rates.

The basic premise of the author is that housing futures are really not a play on the future, but rather a play on the past since the basis for the index is relatively dated by the time its used. The low volume of home sales tracked in the index also make it less reliable.

Perhaps we should hedge our bets on cheddar cheese and non-fat dry milk instead [Matrix]?


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Housing Going Dutch In Taking The Long Term View

March 31, 2006 | 12:01 am |

A hat tip to [Calculated Risk] for pointing me to this post on [Economist’s View] that discusses Shiller’s long-term views on the current housing boom and presents much of his recent paper Long-Term Perspectives on the Current Boom in Home Prices.

Robert Shiller looks at over 100 years of data and asks the question every homeowner wants to know: what is the short-term and long-term prognosis for real estate values? The news isn’t reassuring, but luckily risk markets are being developed to help people hedge or buy insurance against the risk that Shiller unveils. His controlled series using housing along a canal is fascinating.

For the free full version of Shiller’s work as a download which requires registration, go here.

Professor Shiller has been calling for crash of housing for the past 5-6 years and he has focused on more pyschological reasons. He is consisent with his point, similar the way the Economist magazine is on this position. Bearish on housing.

Dean Baker, Center for Economic and Policy Researh also has a paper out: The Menace of an Unchecked Housing Bubble

An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. According to Dean Baker, like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardships.

For the free full version of Baker’s work as a download which requires registration, go here.

I subscribe to me Baker’s email list and find much of the publication very informative as well. He’s bearish on housing too.

UPDATE

To digress a bit:

Although Austin Powers made a case against the Dutch, (wink) here’s one to invoke sympathy. In Lisa Chamberlain’s article Pressing a Claim for Dutch History [NYT] she discusses the eminent domain taking of land by the Metropolitan Transit Authority from the Collegiate Church Corporation which has owned it for 282 years.

The controversies covering eminent domain takings appear to be on the rise as government authorities have more lattitude than ever before. More to come.


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What Do Cheddar Cheese, Nonfat Dry Milk and Housing Have In Common?

March 24, 2006 | 12:05 am | |

Besides the hot futures and options vehicles nearly every American trades such as cheddar cheese and nonfat dry milk (just kidding), starting March 31st, investors can now trade housing index futures as well.

The indexes will be called the S&P Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl Chase and Robert Shiller, author of the influential book “Irrational Exuberance.”

The press release provides a good overview: S&P Set to Launch Metro Area Home Price Indices.

There will be a composite index weight by market size and one for each of the following ten cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter Index, San Diego, San Francisco and Washington D.C. I would venture a guess that the NY Commuter Index includes New York City, the outlying suburbs of Westchester and Fairfield Counties, Long Island and Northern New Jersey.

This index won’t render the OFHEO Housing Price Index or the various NAR indexes obsolete because this covers 10 metro markets rather than entire country.

However, it looks like the methodologies employed in this index are far better, with less bias than the NAR and OFHEO numbers. Here’s a series of white papers on the Chicago Merc’s site that sums it up nicely as follows:

_National Association of Realtor (NAR) Indexes_
– NAR indexes quoted as median home values and do not use repeat sales methodology
– Median values do not address homeowner returns and may readily be skewed if composition of housing stock changes, e.g., new luxury subdivisions are introduced to area

_Office of Federal Housing Enterprise Oversight (OFHEO)_
– Uses repeat sales methodology
– BUT … sample confined to Fannie & Freddie conforming mortgages and, therefore, skewed to low end of housing market
– Only perhaps 1/6th of California housing sold with conforming mortgages
– Uses appraisal data to supplement sample … appraisals tend to be upwardly biased?

What does a housing index that can be traded do for us?


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The Wealth Effect: Stocks vs. Housing

August 19, 2005 | 8:12 am | |

With the discussion today comparing stocks versus real estate, its worth taking another look at a research paper from a few years ago: Comparing wealth effects: the stock market versus the housing market [Note: PDF] written by professors Case, Quigley & Shiller. In their abstract they state:

We find a statistically significant and rather large effect of housing wealth upon household consumption.

The wealth effect is defined as:

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

The impact on consumer spending is more than double when tied to the value of their home rather than their stock portfolio. This has broad implications for the economy and is likely of significant concern to the Federal Reserve in their recent policy of reigning in the threat of inflation.

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