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

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Geoff-UK's picture

Someone please pass on to Mr. Middleton that he should un-install Microsoft Powerpoint from his computer.

I feel confident that HE knows what he meant to impart, but it's a shock to the eyeballs to see he expects me to wade through all that to find out what the hell his main point is supposed to be.

The chart porn's out of hand.

tom's picture

Okay we know the Case Shiller index sucks. How about the FHFA?

Billy Ray Val's picture

I wonder how this analysis looks when one breaks out the individual areas from the aggregate.  The black holes that are FL, NV, CA, can bring down the nation as a whole. 

Side Note:  A broker told me how now was the time to buy due to record low interest rates, record high affordability.  The broker has rented for 15 years.




Fred Hayek's picture

tahoebum.  It doesn't work like that.  I'm in Massachusetts not Cali but I don't think you can just get a project approved anywhere in Cali on the spur of the moment.  It just doesn't work like that.  If its like Massachusetts, you need allot at least a year of permitting time for drawing up plans and getting permits, more like 15 months, for any project more than just a couple lots.

And I seriously doubt that Wall Street was calling up Lennar telling them to build houses.  Did they also call up fish and exhort them to swim?


tahoebumsmith's picture

Stage was set early on in 2002-2004 when the interest rates were reduced to record lows. First stage was to buy up big swaths of land to inflate raw values. Once the synthetic markets took hold and the fenzy was fueled it was game on! I'll gladly walk you down the street of dreams in any of these towns so you can see it for youself. Don't fool yourself into thinking that everything was regulated. Big difference between Mass. and Cali and the biggest difference was that Cali had the bulk of unqualified suckers to stuff into their houses.

LauraB's picture

Thanks again for keeping this issue at the forefront, Reggie!  Looking forward to your appearance on Bloomberg!

tahoebumsmith's picture

So, why is Lennar’s most profitable division essentially a hedge fund that buys and sells bad mortgages and REOs? Because they were a big part of the original plan and they still want their cut. Lets not forget when the CDO and MBS market was on a binder, Wall St. would call up these builders and say, " We need another town in California next month". The builders would deliver and build the next leg of the scam...Lets name it Lincoln, Manteca, Mountain House, or Elk Grove. They would build the town for Wall St. and put anybody with a heartbeat into the house and package the toxic crap up and sell it as a AAA rated investment to what ever sucker came along. Meanwhile knowing the whole thing would come crashing down they were buying up CDS from AIG just waiting to get paid on the other end when the whole scam came unraveled. What a great deal, get paid on both ends! GS was the bread winner even though they were the ones that were driving the bus into the cement wall. So now that the scam has crashed the builders don't want to be left out in the cold? or were they in so deep with the financial crooks that they have to be taken care of otherwise...maybe they sing? I wonder why there is nobody in Jail? These top builders were lining their pockets building cheap $200k houses and selling them for $699k? WTF......Now they are a hedge fund? and you wonder why? Once in the mafia, always in the mafia, that is until you're dead.

markar's picture

what happens to Rialto when the foreclosure fraud class action suits go viral?

marty.mcfly's picture

 The real question is how much more government intervention.  The HOUSE will double down on their bet.  The government has the most to lose if their house of cards (no pun intended) crumbles.  The perception of a stabilize housing drives consumer confidence, spending, construction, refinancing, political unrest, monetary confidence… etc. 


The government is hoping that stabilizing housing will result in a cheaper dollar and inflation of all other goods. 


kaiserhoff's picture

Good points, Reggie.

None of these reporting services can measure what isn't happening.  The market is not clearing.  The inventory numbers are a bad joke.  In the midatlantic, you could buy half the town if you were a serious buyer, but there are almost no serious buyers at anything close to these asking prices.  Look out below.

TraderTimm's picture

Reggie, I haven't complimented you on your posts - but I really should. So I am doing so now. Thoughtful and full of datapoints. Wish you were on some mainstream media so the talking bobble-heads had a real reporter to look up to.

Good work, man.

Panafrican Funktron Robot's picture

Thanks for posting this Reggie, shows very clearly the real state of housing as an actual business instead of a fluffed statistic.  This is significant because the housing market is such an important part of our economy and shows no signs of improving, particularly in light of the foreclosure mess that will put a stop to probably the only segment of the market that was actually moving pretty well.  In other words, home sales are about to fall off yet another cliff, yet, home prices will probably remain relatively flat or even improve slightly.  This creates the false impression that the housing market is improving when it clearly isn't. 

Panafrican Funktron Robot's picture

Just saw that this is going to be on TV, awesome, very excited about this!

Temporalist's picture

Don't forget to mention that mortgage rates through all of this are at historic lows and still not having a significant positive impact on RE sales. 

Also the "reasons," i.e. excuses, for poor RE sales figures were weather for the first 3 months of 2010, then tax season, and they still had the tax credit, then it was summer was too hot or the oil spill was distracting, it was/is always something - but never that there is a depression.

Housing used to be 6% of GDP; now it is 2%.


MarketFox's picture

It's $ in ...$out...

Not what the condo sold for the building...


Good observations RM...


Just like Bill Gross mentioned previously.....if the government does not participate in the mortgage market....Firm's like Pimco would want proof of an income stream and 30% down....

So what would house values be under this scenario ?

Thus as shaky as the government would only want to buy at a conservative number...reflective of Gross's comments.....

Which would be much lower prices.....

Dreamwalker420's picture


My friend sold his house, accidently, in 2005.  He profited nicely.  He held the profit in cash and purchased another home in a different state where it was significantly cheaper to live.  He sold that house shortly afterwards in 2007.  He sat on the cash as I tried to explain that the markets would move downward.

The tax credit from the government created a cushion, altering the perception of the buyer.

His logic to purchase again was rooted in the actual expenses he incurred each month.  He was paying rent, and other costs that would be incurred in a property he owned ... why not buy?  How much does the market have to decline for him to have made a bad decision to purchase?

At $160k, a drop of 20% is $32k ... renting, he was loosing about $600 a month (not a scientific determination).

That is 53 months ... just inside his target of 60 months before he expected he would ever sell the property.  So, if the property drops more than 25% in the next five years, he will have lost money on the deal.  Having never seen the Great Depression and not educated about the particulars of how a market functions, he assumes that prices cannot fall that much or that fast, and if they do they will recover in time.

What makes his purchase decision truly abhorent is when you price it in gold, or adjust it for inflation.  The experience of watching him waste dollar bills was an eye opener: consumers cannot think beyond paycheck to paycheck, so they don't make decisions outside of that framework.

His reasoning is rooted in his perception of value in the stability of dollar denomination.  He doesn't expect the USD to become toilet paper ... it can't in his mind.  He doesn't value gold, so it's lost purchasing power are irrelevant to his purchasing decisions.  Gas, food, cars, real estate make sense to him.  They are simple, tangible, assets that he expects to need and consume.  He realizes that a phenomenom is causing the purchasing power of his dollars to go down as prices go up ... but he in unable to associate the reasons for this reality.

A condo next door was selling for 25% less within three months of his purchase.

I expect the USG to announce another "tax credit" in January that will begin in April.  I would expect something in the $18k to $35k range ... anything to keep retail purchases and prices up.

Consumers will continue to buy as the market slides down more and more ... but ever so gently.  In accordance, without another massive printing of cash by the Fed, dollar denominated assets will continue to experience price deflation.  This slow decline is the race to the bottom.

Ripped Chunk's picture

Not everyone can be a financial wiz.

Widowmaker's picture

Excellent commentary, Reggie.   Thank you.

Careless Whisper's picture

case shiller has its flaws. it excludes bank owned single family homes, and they are significant in some states. plus on new homes, the builder may not lower the price, but instead throws in $50,000 worth of upgrades. case shiller seems to get thrown around like its the equivalent of the s&p500 and its not.

anony's picture

Shhh...Better to not have this go viral.

Once Barney Frank, Christopher Dodd, Christopher Cox (whatever happened to that nimwit who has managed to escape without so much as strap spanking?) CONgress and the bamster get hold of it, they'll come up with some scheme to put the homeless, drifters, grifters, illegal aliens, impecunious runaways, crack-whores, and dickie fuld, in those millions of houses under section 8.  

MachoMan's picture

at the last instant before they were homeless, etc., or otherwise lost to it, that's what the government already did...  this isn't a prospective thing...  it already happened...  middle america aren't the only ones who have failed to recognize their appropriate (real) standard of living...

breezer1's picture

yeah, another one for you reg. if you keep spitting out the facts this economic thingie is never going to turn around. i urge everyone to read msn daily and avoid the facts. don't worry, be happy. no depression here.


Sudden Debt's picture

I wonder how much houses where already accidentally burned down that where fully insured...

Do the fire departments keept track of that?

dussasr's picture

These days when the neighbors see a house fire they all know to wait 10 minutes before calling the fire department...

MachoMan's picture

(and do everything short of putting on the foam number 1 hand and cheering it towards their houses).

TuesdayBen's picture

Got one 1.5 blocks from me, close enough to have smelled the smoke.  2,000SF 1950's job on a really nice corner lot - a major underimprovement.  Burned to the ground in late 2006 after the guy bought it for $725K in 2004.  I don't know the, ahem, cause.  In any case, the guy put up a 5,000 SF'er in 2007, still lives there.  Probably worth $1.3M in 2007, perhaps $950K today.  Probably not working out like he might have hoped.

Ripped Chunk's picture

Arson was not detected or you would have heard about it big time. They like to keep the citizens warned about "serious offenses" like arson and insurance fraud. 

Like the DUI "public service announcements" on TV where the guy's car is filled to the window with beer or a cocktail: "you will be caught !"

MachoMan's picture

Insurance companies sniff out arson like pregnant women sniff out pickles and ice cream...  if the guy did burn it down, he was smart enough not to use accelerants (had a local guy maybe 15 years back use rocket fuel to burn down his house...  insurance didn't pay...  doh!)...  an attorney around here got busted for this I believe...  jury (all women) verdict for the state...  looking at 10 to life, loss of law license, and probably loss of butt cherry...

Practically speaking, they're going to have to be bulldozed or burned one way or the other...  sounds like your guy is just getting the party started.  Although, it might be best to wait to save the wood for winter when the electricity is out and heating oil is too expensive to purchase.

RichardENixon's picture

I got caught and there wasn't a drop of alcohol in the car. It was all in me. Those public service announcements are misleading.

chopper read's picture



this is a great question.

bullchit's picture

Reggie, you may want to revise your chart figures as you are quoting quadrillions and up.

Maybe change the commas for points, as in 1.946 trillion.


Reggie Middleton's picture

The charts dobhqve typos but I am on he run now. Will update them later.

lamont cranston's picture

From the Department of Stoopid Department, courtesy of our local rag...a bankrupt mixed-use center foreclosure was delayed due to new tenants - one a homebuilder and the other a commercial RE brokerage founded in 2009. Two solid gold tenants, no doubt.

The blind leading the blind. Keep at it, Reg.

Fat Ass's picture

What a great article. Not just a thought piece, not just an opinion .. research, analysis, conclusions. Thanks, Mr. Middleton.

masterinchancery's picture

Case-Shiller is upwardly biased because it cherry-picks the best part of the market, existing single family homes that can be resold, and also because it does not reflect an accurate basis for tear-downs because there is no info on MLS on the cost of building the new property.

Coldfire's picture

Tell it, brother. The pathologically persistent housing fetish reminds me of the dotcom yelpers yammering about treasures like, Peapod, until well into the next bubble. Bricks and mortar didn't turn out too well, either.