A Closer Look at Housing "Deceleration"
One of the issues I am constantly pushing back against are the spinmeisters who purposely falsify data, news or commentary to meet their agenda. At best, they ignore the obvious and spin the not so obvious. Many of the subjects I cover are a result of trying to clarify the bull$%# I read and hear elsewhere.
The latest source of nonsense courtesy of the sunshine crowd? The Q2 OFHEO report. I took particular issue with comments like "Home Prices Holding Up." That represents willful ignorance to me.
Consider this: The Office of Federal Housing Enterprise Oversight called the shift in home prices "the largest deceleration in 3 decades." Even the ususally demure director of OFHEO was quoted as saying "These data are a strong indication that the housing market is cooling in a very significant way." That's quite a negative commentary -- even more so when you consider it only covered Q2 (up to June 30 '06). So we've have 2 more months of "Price Deceleration" since that data was assembled. Gee, I wonder if home prices somehow re-accelerated?
What makes the "Home Prices Holding Up" stuff such nonsense is that there isn't a national market for homes; instead, we have a series of regional markets. Watch what happens to the "Prices Holding Up" meme when we dissect the real estate economy region by region:
"Prices of traditional single-family dwellings fell in 87 of the nation’s 379 major metropolitan areas from the first quarter to the second, the government reported yesterday, as the overall value of homes leveled off across the country.
On a quarterly basis, prices were lower in Boston, Sacramento, Pittsburgh and much of the Midwest, where the loss of manufacturing jobs has hit the housing market hard...
Price declines are spreading to more parts of the country. The 89 areas affected in the second quarter compares to 66 metropolitan areas where prices fell in the first three months of the year. In the fourth quarter last year, only 29 areas reported such declines."
For you students of the technical analysis, that is what we call a Trend.
Here's a math quiz: Fill in the blank:
29, 66, 89, ___
Anything in the 110-130 range gets you an "A." If you can explain why 150 is an acceptable answer, you get extra credit.
The question, by the way, is "How many metropolitan areas showed price deceleration in Q3 2006?" The math is pretty simple here: If this was a ECON 101 exam instead of math, you would see this question:
Increased inventory supply, and decreased demand = ?
The answer is "decreased prices."
That's why the Prices Holding Up stuff is utter fantasy. We discussed this a few weeks ago -- the way the data is assembled can give the appearance of stable prices: Why Don't Big Housing Sales Drop Produce Big Price Drops?
Talk to any real estate agent you know personally -- especially on either coast -- and they will give you the straight dope as to traffic, sales and price reductions. I don't believe prices are remotely holding up (just as I don't believe Labor Costs have risen appreciably.
More later . . .
~~~
Sources:
Home Prices Fall in Nearly One-Fourth of Metropolitan Regions
VIKAS BAJAJ
NYT, September 6, 20
http://www.nytimes.com/2006/09/06/realestate/06home.html
HOUSE PRICE APPRECIATION SLOWS
OFHEO House Price Index Shows Largest Deceleration in Three Decades
Office of Federal Housing Enterprise Oversight (OFHEO), September 5, 2006
http://www.ofheo.gov/media/pdf/2q06hpi.pdf
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Comments
Barry,
You can't look at the OFHEO HPI numbers without keeping in mind the source dataset that they use to generate that index.
6. What transactions are covered in the HPI?
The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included. Conforming refers to a mortgage that both meets the underwriting guidelines of Fannie Mae or Freddie Mac and that does not exceed the conforming loan limit, a figure linked to an index published by the Federal Housing Finance Board. The conforming mortgage loan limit for single-family homes in 2006 is $417,000. Conventional means that the mortgages are neither insured nor guaranteed by the FHA, VA, or other federal government entities. Mortgages on properties financed by government-insured loans, such as FHA or VA mortgages, are excluded from the HPI, as are properties with mortgages whose principal amount exceeds the conforming loan limit. Mortgage transactions on condominiums, cooperatives, multi-unit properties, and planned unit developments are also excluded.
Caveat Emptor!
James
Posted by: James Bednar | Sep 7, 2006 8:56:43 AM
37/29 = 1.2759
1.2759 * 89 = 113
To get 150 has to be due to momentum, and I only had time for the easy math.
Posted by: Uncle Jack | Sep 7, 2006 9:00:37 AM
"What makes the "Home Prices Holding Up" stuff such nonsense is that there isn't a national market for homes; instead, we have a series of regional markets. Watch what happens to the "Prices Holding Up" meme when we dissect the real estate economy region by region:"
SO, IF YOU CORRECTLY THINK THAT WE HAVE A SERIES OF REGIONAL MARKETS, ARE YOU NOW SAYING THAT THEY WILL ALL GO DOWN IN QUARTER OVER QUARTER PRICE , OR JUST SOME?
Posted by: Larry Nusbaum | Sep 7, 2006 9:01:48 AM
and they usually never talk about volume of sales or inventory..... they only talk about price which means nothing on light volume ....... just like any market , it's not just price but volume as well
Posted by: je | Sep 7, 2006 9:08:42 AM
http://millionairenowbook.blogspot.com/2006/09/is-it-housing-bubble-or-credit-bubble.html
Posted by: Larry Nusbaum | Sep 7, 2006 9:09:05 AM
Barry, how are you working housing price deceleration into your inflation expectations?
Posted by: Royce | Sep 7, 2006 9:09:22 AM
je: That's not their job.
http://www.ofheo.gov/HPIMSA.asp
Posted by: Larry Nusbaum | Sep 7, 2006 9:10:19 AM
Larry ,
that's exactly the point
Posted by: je | Sep 7, 2006 9:18:50 AM
The home builders (including condos) have been crushed because so many people who were looking to flip their positions (before they closed) have all gone away.
Posted by: Larry Nusbaum | Sep 7, 2006 9:21:49 AM
I think a good indicator for housing is the midwest. When prices are down & inventory up in a "non-bubble" area, you know trouble is coming.
Posted by: Josh | Sep 7, 2006 9:22:22 AM
Ahh Barry, it does not really matter what you and I believe but what the market believes, when it starts to believe it, and what happens to prices as a result. The pyschology has shifted, of that I am certain. Question, as always, is how to make money from this knowledge. Great blog. Good thinking and posting.
Posted by: doh! | Sep 7, 2006 9:30:55 AM
2*9 = 18
6*6 = 36
8*9 = 72
?*? = 144
Since an answer in the range given isn't possible (I think), this must not be right, but the pattern sure is interesting...
Posted by: Aaron | Sep 7, 2006 9:36:39 AM
Markets can be totally irrational only for so long -- and that's often longerr than you and I expect.
I came into this week 92% cash -- instead of short, only because I dont know how long the irrationality can last.
Not for ever, and it appears likely not for very much longer . . .
Posted by: Barry Ritholtz | Sep 7, 2006 9:36:59 AM
"Not for ever, and it appears likely not for very much longer . . ."
Now what I would find interesting is the "tells" you are watching and what you are looking for before putting some of that 92% cash to work (what is the 8% invested in?) Of course, if I were one of your hedge fund investors I would prefer you keep quiet on this so I understand if no answer is or will be forthcoming. Blame it on the lawyers. LOL.
Posted by: doh! | Sep 7, 2006 9:49:56 AM
short high beta ETF's vs. lower beta ETF's
Posted by: BB@ | Sep 7, 2006 9:52:08 AM
Housing stocks ... interesting here on HOV miss
Posted by: fp | Sep 7, 2006 9:53:51 AM
James is right, the key thing to remember in looking at these numbers is that you are looking at the cream of the crop mortgage-wise.There are lots of markets, especially in California, where the price of the home pretty much means you can't get a conforming mortgage.
The biggest trainwreck is going to be occur in the subprime and exotic end of things and the reprecussions for the non-agency MBS market are going to be severe. That market could well dry up quickly, just as Wall St is jumping in deeper. I'm betting that in a year Merrill Lynch's recent move into the retail subprime market will be seen as the height of financial miscalculation.
Posted by: Bob_in_MA | Sep 7, 2006 9:58:01 AM
Market conditions for Arlington Heights, Illinois
Posted by: jm | Sep 7, 2006 10:05:34 AM
The National Association of Realtors (NAR) finally concedes that home prices will fall.
Home Sales Forecast Lowered, Prices To Dip Temporarily (PDF)
Home sales during the rest of the year will be lower than earlier projections as the market works its way through an inventory and price imbalance, according to the National Association of Realtors®.
David Lereah, NAR’s chief economist, said the most obvious effect in the near term will be with home prices. “A year ago we had record home sales and tight supply with buyers bidding over the asking price,” he said. “This year sales are slowing, homes are plentiful and sellers are negotiating. Under these conditions, we’ll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory.”
“This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms,” Lereah said. “Keep in mind that over time, home prices rise at the rate of inflation plus one-to-two percentage points – buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned.”
Caveat Emptor!
James
Northern NJ Real Estate Bubble Blog
Posted by: James Bednar | Sep 7, 2006 10:22:22 AM
Transaction prices in many areas may be holding up artificially since many realtors (especially in Cal.) are giving $ incentives to the buyer in order to keep the actual sales price elevated. This can on for only so long.
Posted by: Steve C | Sep 7, 2006 10:26:35 AM
Thanks again for another valuable rant.
I posted here months ago on the new home sales nos.
Govt nos. did not jive with the home builders nos. Since the home builders have Sarbanes oxley as a tail wind, their nos. always seemed to be the ones to go with.
Govt's numbers had an absurd margin of error. (over 50%). Also a sign that manipulation was in the wind.
Silly me, I still look forward to the parties to these frauds facing the music. Not likely is it. Very frustrating.
Posted by: advsys | Sep 7, 2006 10:29:25 AM
I'm not sure what to make of the midwest data considering that outside of Chicago, Mpls, and a handfull of other cities the area has been in decline for a good long while. Given the layoffs at GM and Ford, not to mention decelerating overtime pay, people's incomes in the midwest are in decline. This is not to deny bubbles may exist in the Midwest. I just think we could be looking at a real decline in value while still in a bubble environment. It is simply amazing the amount of manufacturing in the Midwest tied to domestic auto sales in some way.
Posted by: M.Z. Forrest | Sep 7, 2006 11:10:46 AM
The problem with the Midwest is that the crowd/herd mentality understanding there is a bubble, is rushing to sell their houses, increasing the inventory, driving down prices.
What I'm saying is the midwest data is more of a key to the national picture than just looking at the coasts.
Beige book yesterday for Cleveland district said 3 of the largest builders have incresed their incentives, stopped building spec homes, are paying more for building materials, and laying off people. Though the people laid off probably aren't really in the work force since they are either amish or illegal.
Posted by: Josh | Sep 7, 2006 11:16:42 AM
Not sure about some of the mathematicians on here but the sequence given:
29, 66, 89, n
66-29 = 37
89-66 = 23
This sequence is slowing down.. not speeding up. So, I would guess n = 98 since 37-23=14 and 23-14=9 and 89+9=98. In the least, I would guess n<110.
My most solid guess would be:
n=103
..based on 23/37 ~ .62 and (.62)*23 ~ 14 and 14 + 89 = 103. Having it change by a percentage of the last change makes sense since it'll keep the sequence from decreasing soon (which is what happens using the first method).
Naturally, you could come up with more exotic formulas that would have the rate of increase decrease at first then begin increasing later. but, there's other work to be done so I leave that up to someone else.
eli
Posted by: eli | Sep 7, 2006 11:22:05 AM
I agree Josh, the national picture will behave similarly to the midwest. What I am cautioning is that the decline in real estate values may be rational action in an irrational market, not an irrational market coming back to equilibrium.
Posted by: M.Z. Forrest | Sep 7, 2006 11:24:52 AM
