Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium.

Reggie Middleton's picture

Note: See me discuss this topic live on Bloomberg TV, Monday October 4th, 2010 at 4:30 pm!

As illustrated in the post “,
many mainstream media outlets and investors (retail, institutional and
professional included) have become to reliant on the easy to quote, easy
to publish and convenient to manipulate Case Shiller home price index.
While an econometric marvel, it is not perfect. As a matter of fact, the
imperfections that it does have happen to materially and significantly
minimize the influence of the factors which actually contribute greatly
to the current housing malaise. This, in and of itself, is significant
enough of a reason for interested parties to look past the Case Shiller
index in to other metrics that can help give a more accurate picture of
what is actually happening on the ground.

Subscribers have access to all of the data and analysis used to
create these charts, in addition to a more granular application, by
state in the SCAP template and by region in housing price and charge off
templates – see

Click here to subscribe.

Another problem that I see as I scan the popularly followed financial
rags, TV broadcasts and blogs is the sole (or nearly so) reliance on
price data to gauge the health of the market. Prices can be very
misleading if viewed in a vacuum, and most view the Case Shiller index
which itself is a flawed metric if not used properly, in a vacuum.
Often, by the time prices start shifting, it is too late to take
advantage of the opportunities, or escape the damage from the lack
thereof. At the very least, one can be mislead into a false sense of

Case in point, is the following of price data when dealing with new, single family houses. On September 2nd, I wrote “More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders
wherein I attempted to illustrate exactly how bad the home building
situation looked 4 years after the homebuilder market had tanked. I

We looked into Lennar to see the impact
of the distressed investments group (which is the companies’ Rialto
segment) on its operations. Key observations regarding the same are
summarized below:

  • Rialto segment which the company started reporting (from 1Q10) is
    described by the company as, “Our Rialto segment provides advisory
    services, due diligence, workout strategies, ongoing asset management
    services and acquires and monetizes distressed loans and securities
    portfolios. In its 3QFY10 transcript with regard to segment’s
    description the management said, “Simply put, we purchase large and
    small portfolios of loans and REO at distressed prices and then we work through those assets one at a time to resolve them at retail payoff. It’s
    all about making money by managing the process of purchasing
    wholesale and selling retail – purchasing in bulk and selling one at a
    . Admittedly, the assets are a little bit more complex, but this is where we excel.”

So, why is Lennar’s most profitable division essentially a hedge fund
that buys and sells bad mortgages and REOs? Because the need to build
houses is dead and will be so for some time. Meanwhile, the need to deal
with excess distressed inventory is strong, and will get significantly
stronger as time goes on. See for yourself difference one’s outlook
makes when looking at housing value transactions, as adjusted for
inflation as compared to prices (which in the case of Case Shiller,
exclude the drags on pricing such as flips, investor properties,
vacation/2nd homes, condos, and REOs)…


You should be saying to yourself, “Damn, that’s a big difference!!!
Why are homebuilders still in business?”. That, my dear readers, is a
very good question. Of course, they can all just transform into
government subsidized hedge funds and trade with no risk, no cost money
from the government through the PPIP program.

Even if one were to focus simply on existing home sales, the reality
makes the Case Shiller numbers look downright Goldilocks in comparison…

When I said worse, I meant it. July was the worst month on record,
while (August was the 2nd worst month). We haven’t seen this this in the
media, have we?

Currently, we are back to 1995 levels of activity, despite
significant population growth. If these numbers were to be normalized
for population growth (of which we had a boom in the ’90s) we could very
well be back in the ’60’s of ’70’s in terms of activity. I haven’t run
the numbers, but one definite conclusion to be drawn is that we are
still on a steep decline after considering all of the government efforts
and the still increasing foreclosures, distressed and shadow inventory.

Now, let’s put this all together to see what we get…

When quoting the Case Shiller index on a regular basis without taking
the whole picture into consideration, you get the equivalent of
lipstick on a rhinoceros. Even though it may not look very pretty, it
still looks a lot prettier than it actually is, and dangerous too!
Notice how the Case Shiller index kept increasing in value as the
economic housing activity in this country dropped off sharply! By the
time the CS index turned down  by a single percentage point, home sales
value had already declined by 19%, which meant when you saw prices
starting to decline you would already have encountered a problem selling
your house. For those that wait to hold out for that best price, their
issues are just compounded over time as both price and activity tumult.

Even as the Case Shiller index showed improvement from .gov bubble
blowing, the true economic value of housing activity as adjusted for
inflation was dropping by 37%! You’re not hearing this in the media, are

Subscribers have access to all of the data and analysis used to
create these charts, in addition to a more granular application, by
state in the SCAP template and by region in housing price and charge
off templates – see

Click here to subscribe.

Next up…

  • The Full Google Forensic Analysis: for all of those who wondered how
    Google will make money from Android and the other initiatives it is
    undertaking as well as how it will effect valuation, well here you go.
  • About the likelihood of those sovereign defaults: I will walk
    through the near inevitable default of one European sovereign state, in
  • Now that third quarter is over, and the housing situation still
    looks ugly, how will the big banks fare after 100% pops in their stocks
    the year before? Multiple forensic updates…
  • Do you believe this portable computer cum smart phone thing is not
    only the wave of the future but the catalyst for significant corporate
    wealth? Well, I do and I will browse through some of the potential
    winners in the space.
  • Last but not least will be a very extensive forensic analysis of Apple.

More Reggie Middleton on Residential Real Estate:

Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!

Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!

Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…

Because 105% LTV On Depreciating Property Wasn’t Good Enough for the US Taxpayer…

Told You Housing Was Going to Take a Downturn for the Worse. I’ll
Tell You Something Else, We Are in a Housing Depression! It’ll Get
Worse Until Market Forces Rule Over Government Bubble Blowing!

As I Made Very Clear In March, US Housing Has a Way to Fall

It’s Official: The US Housing Downturn Has Resumed in Earnest

The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream Med