News analysis: Why prices are slippery on the way down
Foreclosures in 'exurbs' weigh on Case-Shiller indices
By Matt Carter, Wednesday, June 25, 2008.Bookmarking Sites
Home prices within California's Los Angeles and Oxnard MSAs fall at different rates between September '06 and mid-year 2007.It used to be that when real estate markets went south, they did so in a somewhat leisurely fashion. Buyers stopped buying and builders stopped building, but prices would stagnate or get a little soft -- not plummet overnight like the stock of some corporation that's been flown into the side of a mountain.
Housing prices were "sticky" on the way down because homeowners would look at what their neighbor got for their house at the height of a boom, and decide to hold out for the same -- or at least something in the ballpark, even if that meant waiting a long, long time.
That's especially true when the enthusiasm of would-be buyers is curtailed by rising interest rates, says Karl Case, the Wellesley College economics professor who is the co-creator with Yale economist Robert Shiller of the Standard & Poor's/Case-Shiller home-price indices.
Housing prices in California nearly tripled during a five-year boom that ended in 1980, Case notes in a new paper posted Tuesday by Standard & Poor's. When the boom ended, mortgage rates were between 16 and 18 percent. But instead of crashing, home prices stayed stable because nobody wanted to sell. Selling meant paying off your fixed-rate mortgage and getting into a new one at exorbitant rates, Case says.
An S&P/Case-Shiller home-price index that's a composite of 20 major U.S. metro areas released yesterday showed price declines of 15.3 percent in April compared to the same month a year ago. On May 27, S&P/Case-Shiller's separate national home-price index estimated a 14.1 percent year-over-year decline in U.S. home prices during the first quarter. That compares to a 2.8 percent annual decline at the height of the 1990-91 recession.
What's different about the latest downturn?
Adjustable-rate mortgage (ARM) loans. During past downturns, people who bought in at the peak could choose to hang on to their homes until demand returned. The monthly payments on their fixed-rate loans didn't go up.
But many who bought into the latest boom with ARM loans assumed that continued price appreciation would allow them to refinance before their interest rates reset and their payments went up. When prices stopped climbing, many were unable to refinance and their homes ended up in the hands of their lender.
Case's explanation for the lack of price "stickiness" this time around is that when banks foreclose on properties, they don't have the luxury of waiting for markets to recover. They need to cut prices to get properties off their books, fast.
"When a bank or other institution holding a property after foreclosure puts the home on the market, it wants to clear inventory and be out," Case writes. As long as foreclosure auctions continue to account for a significant portion of homes sales, "prices will continue to fall until the market clears. When it does, the traditional stickiness will return and prices will eventually stabilize."
Some in the real estate industry have speculated that the S&P/Case Shiller indices and the news media intentionally exaggerate price declines.
In their annual report on the state of the nation's housing, experts at the Joint Center for Housing Studies of Harvard University note there are three major home-price indexes, all of which use different methodologies.
But after looking at all the indexes, the folks at Harvard concluded that national home prices were down 12 percent in the first quarter of 2008 from their October 2005 peak. After adjusting for inflation, that's 18 percent in real terms. Ouch.
Since the messenger refuses to be shot, perhaps we should examine the message more closely.
While it's a truism that "all markets are local," when you see how Case's theory is playing out within metropolitan statistical areas (MSAs), you can sympathize with Realtors who distrust home-price indices -- even as you see why their suspicions are misplaced.
In another paper posted by Standard & Poor's, David Stiff -- the chief economist for Fiserv Lending Solutions, the people who crunch the numbers for the S&P/Case-Shiller indices -- looks at price trends at the ZIP code level within the Boston and Los Angeles MSAs.
Between September 2006 and the second half of 2007, the S&P/Case-Shiller index shows single-family home prices in the Los Angeles MSA falling by 8.9 percent.
At the ZIP code level, prices fell much harder -- more than 15 percent -- in many outlying suburban/exurban areas that were particularly popular with speculators. But ZIP codes near job centers in downtown and West L.A. experienced price declines of less than 5 percent. The pattern is even more distinct in Boston, where jobs are even more heavily concentrated in the downtown area.
Realtors have a right to be upset when their clients get the mistaken impression that media reports of national home-price declines pertain to their local market. What papers by Case, Stiff and two others recently published by Standard & Poor's demonstrate is that you also have to take the numbers for an MSA with a grain of salt. They may overstate -- or understate -- price trends in a particular ZIP code.
"We all know that prices in neighborhoods within an MSA vary widely, but it may be that we need to consider that more closely when we think about an index at an MSA level," Stephen Bedikian, partner and research director at market analysis firm Real IQ, writes Inman News.
Bedikian raises another issue worth considering: If distressed property sales in outlying suburban and exurban areas are accounting for more than the usual share of sales in a given MSA, that could be distorting the price trends for the entire MSA.
"The index isn't intentionally misleading but it is just a function of sales that occurred in a recent month," Bedikian writes. "For example, if 100 percent of sales captured in the index occurred in the Inland Empire one month, then the index reported for the Los Angeles MSA that month would be terrible despite the fact that prices held up nicely in Santa Monica and other areas."
What remains to be seen, however, is whether ZIP codes in major metropolitan areas that have weathered the downturn so far are merely exhibiting price stickiness. Although fewer properties may be ending up in the hands of banks, these areas may end up feeling the full impact of the downturn, but over a longer period of time. Areas where homeowners aren't forced to sell may simply correct the old-fashioned way -- slowly.
Instead of rapid price declines, property values in areas near job centers may fall gradually or stay flat for some time, just like back in the good old days.
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Submitted by Karl von Loewe on June 25, 2008 - 1:15pm.
One of the many problems with the Case-Shiller Index is that its labeling is misleading. Although it's called a monthly index, it is actually a rolling three-month average of price changes for the prior period. Because its data coverage is thin - 20 areas - this three-month average is necessary to "fatten" the sample, not to "increase accuracy" as frequently reported in the media.
Karl von Loewe, Broker/Associate
Prudential NJ Properties, Hillsborough, NJ
Submitted by Norm Biller on June 25, 2008 - 1:46pm.
In Lexington, KY we're seeing strong home price appreciation inside New Circle Road (our first "ring"). The farther out you go beyond that, the more likely it is that a neighborhood will have flat or decreased prices.
All the factors cited above are contributors, with the increased cost of commuting right up there near the top of the list.
To say our prices are either up or down is virtually meaningless. You really have to look at it neighborhood by neighborhood.
Norm Biller
The Biller Homes Team
Keller Williams Bluegrass Realty
2424 Harrodsburg Rd, Suite 101
Lexington, KY 40503
(859) 223-8373
www.BillerHomes.com
Norm@BillerHomes.com
Submitted by Jeff Jacobson on June 26, 2008 - 9:09am.
The use of oscillating indicators by Case-Shiller may at first hand appear to be "fatening a sample", but a standard statistical technique to indicate a distinct trend as well as the strength. The problem with making information useful on a short term basis is predictability. The problem is "outliers" or random data that may, or may not, be indicative of a trend. By utilizing a longer oscillator frequency, such as 3 months,the data trend is smooth and more of a hindsight or an affirmation of what was experienced.
Traders use fast oscillators to signal rapid trends for immediate decision making... imagine if a monthly or weekly oscillation were used in the real estate industry! Such use by a media group might cause mass elation or panic like the current spot oil market. While traders sell millions of shares in localized markets each day, real estate is a tremendously thin market by comparison in terms of trade, so unfortunately any use of a rapid oscillator in a given market would be of little validity to trade decision maling such as pricing or buying real estate as a basis of predictable performance.
Our market being mostly perception-based, might be better served with the softer science of surveying customers who have recently purchased real estate to examine motivations, objections, and influences in relation to price, but again as mentioned in the previos blogs, the study would necessitate a need for a county or better yet a zip code comparison. Only when a sufficient sample is crunched, examined for correlations and a useable standard deviation produced, could it make an effective tool smaller local markets.
Submitted by Matt Carter on June 26, 2008 - 12:28pm.
So Jeff, sounds like you're saying that while we might like to have monthly data at the ZIP code level, outliers would make that info unreliable?
Your idea of a survey of customers is interesting, but seems like that would be prohibitively expensive -- especially at the local market level. We already have some indication of consumer confidence from surveys at the national level.
Plus, people seem to really want hard data. Any other ideas on how to get it to them?
Submitted by Wenceslao Fernandez Jr on June 26, 2008 - 8:35pm.
There's a tv commercial where a group of executives are wondering how to manipulate certain data for cable vs satellite (or something like it) by stating that the figures they could use to back up their claims are in fact 90% correct, 50% of the time and so, they could make the campaign work.
Although there may not be an intentional manipulation of data to show or prove a particular case for our poor housing market (even if to sell more news?), one can nonetheless make the point that the same data can be shown in any number of ways - perhaps even less negative and more inspiring?.
In the end, it is unfortunately the consumer that is left misinformed, while many in our industry or even sectors of our industry (i.e.: Realtors, lenders, title, insurance, builders, appliance or durable good sellers, construction trades, etc.), are affected financially, affecting everything else in turn.
This continues to feed on itself, creating the mirror image of the over excited market we had -except now, it's under excitement major.
I guess, those with access to data, though probably correct in their point of view, should be careful to cover all the bases and make every attempt possible to offer a balanced, unbiased report.
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by Jeff Jacobson on June 27, 2008 - 7:39pm.
You hit the nail on the head, Matt.
Surveying our small, or thin markets, would be an example of how tremendously expensive. Our samples would be so small that it would be probably statistically difficult to determine an "outlier datum" from the mainsteam sample.
Just an example of how national trnds may or may not have specific relativity to a local market. Perhaps at some point national samples could be divided into smaller population regions. As you probably surmise, most of what we see is raw data, rendered in terms of percentages of averages. This is a start but is often misleading.
What we really need is a standard deviation on price vs dom per price range etc. with a measured probability factor (p score of p>.05, or something imilar) which would indicate that the occurence of the measurements are likely NOT arbitrary. Again, these useful statistic breakdowns are really not economically practical in most small markets. Indicated trends would likely be highly unreliable as outliers would be difficult to detect as well as a plethora of other independent variables. As the previous blog above, by Mr. Fernandez points out, tweaking data is equally unscrupulous and yet another caveat to make our small samples impractical.
I observe as a newbie to real estate, coming in from several other fields of endeavor, that "marketing" is often confused with simply reducing the listing price, then using limited advertising sources in standardized way. I see little creative advertising, but then that is not surprising given the limited margin on a broker-run listing; that in itself is another entire topic that I will, for the sake of brevity, omit here.
The article above is an example of what is termed a "plausible explanation". Plausible explanations are about as good as we can expect to receive and useful as well because of their timeliness to our situations.
Jeff Jacobson
Submitted by John Wake on June 27, 2008 - 9:49pm.
That idea is what I call "The Reverse Ripple Theory of Metropolitan Home Price Corrections" as detailed here.
http://seekingalpha.com/article/71182-the-reverse-ripple-theory-of-metro...
You drop a rock in water. The ripple is largest at the center and becomes weaker as it spreads out.
In the Reverse Ripple Theory of Metropolitan Home Price Corrections, home prices in the outlying areas with a lot of new construction will tend to fall most and first (the splash), as it moves toward the center of the metro area, the ripple weakens and the fall in home prices is progressively less and later.
The "less" part is probably conventional wisdom among real estate geeks. The "later" part is probably not.
John Wake
Associate Broker (and former economist)
HomeSmart Real Estate
www.ArizonaRealEstateNotebook.com
John@HomeSaleNews.com