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Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
From Bloomberg: Home Prices in U.S. Recede as Tax Credit Expiration Hurt Sales
Sept. 28 — Home prices in 20 U.S. cities
rose at a slower pace in July from a year earlier as the end of a
government tax credit hurt sales.
The S&P/Case-Shiller index
of property values increased 3.2 percent from July 2009, the smallest
year-over-year gain since March, the group said today in New York. The
gauge is a three- month average, which means the July data are still
being influenced by transactions in May and June that may have
benefitted from the incentive.
Unemployment
close to a 26-year high and mounting foreclosures will probably weigh
on the housing market for the rest of the year. With joblessness
projected to average more than 9 percent through 2011, some households
will continue to have trouble making mortgage payments, indicating
foreclosures will remain a hurdle for property values.
We saw this coming a while back. It wasn’t very difficult if you remained objective, see “Are the Effects of Unemployment About To Shoot Through the Roof?
… Consumer confidence dropped more than
forecast this month on growing concern over the outlook for jobs and
wages, another report today showed. The New York-based Conference
Board’s sentiment gauge fell to 48.5 in September, the lowest in seven
months, fro 53.2.
… Economists projected prices would rise 3.1 percent year over year, according to the median
of 28 forecasts in a Bloomberg News survey. Estimates ranged from
increases of 2 percent to 4.2 percent. The gauge dropped 0.1 percent in
July from the prior month
after adjusting for seasonal variations, the first decrease since
March. Unadjusted prices climbed 0.6 percent from June. The
year-over-year measure provides better indications of trends in prices,
the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.
… Housing is “bouncing along the bottom,”
Case said in a radio on “Bloomberg Surveillance” with Tom Keene. “It’s
stopped the freefall we saw every month. I don’t think anyone is
predicting it’s going to go up very much.”
… Ten of the 20 cities in the index
showed a year-over-year increase, led by an 11 percent gain in San
Francisco. That left 10 cities showing a decrease, up from five in June,
led by a 4.9 percent drop in Las Vegas. Compared with the prior month,
12 of the 20 areas covered showed an increase on an unadjusted basis,
led by a 1.6 percent gain in Detroit.
“Anyone looking for home prices to return to the lofty 2005-2006 might be disappointed,” David Blitzer,
chairman on the index committee at S&P said in a statement.
“Judging from the recent behavior of the housing market, stable prices
seem more likely.”
I don’t see why he would say something like that. Maybe in a natural,
capitalistic market with unfettered supply and demand, his statement
holds water, but the reality of the situation is that the government has
drastically and materially altered the dynamics of the market by
attempting to artificially stoke demand. To date, the government has:
- created synthetic financing in the form of Fannie Mae and Freddie Mac, who underwrite what would normally be unmarketable loans;
- created perverse tax incentives to entice buyers to purchase housing in a falling housing market;
- drastically altered the interest rate structure of the mortgage
market buy buying hundreds of billions (if not more) in mortgage backed
securities, suppressing mortgage rates to a point where they naturally
have no way to go but up sans the government interventions. This is a
very big point, for the increase in mortgage rates will decrease demand
at a time when supply will probably still outstrip demand by a wide
margin; - altered the supply landscape by placing moratoriums on foreclosures,
which normally act as a clearing mechanism by forcing prices down to a
point where buyers are willing to bite. This not happening now, and we
have a backlog of foreclosures sitting in a market where prices are
still too high to balance the supply/demand equation despite
historically low interest rates (that really don’t have much more room
to fall, but have a lot of room to rise).
Actually, things are considerably worse than this article blurb is
make is making it out to be, and the article is actually rather
negative. To be begin with, the Case Shiller is a rolling 3 month
average, and most of those months are still benefiting from the
government bubble blowing in the form of tax incentives and artificially
suppressed mortgage rates. That means that the few sales that do not
have that (tax) benefit instantly started dragging the index average
down. Listening to Tom Keane on Bloomberg radio this morning, I heard
that home sales were the slowest they have been since 1963. Do you
realize how much larger the US population is in 2010 than it was in
1963, in addition to near record low interest rates, and perverse tax
incentives?
If you think that sounds bad, then you ain’t heard nothing yet. You
see, the Case Shiller is an econometric marvel, and is actually rather
sophisticated. Despite this, it is also a tad bit unrealistic,
particularly where this particular housing crash comes into play. You
see, a decent amount of the housing inventory that is overhung in the
form of new construction from overzealous developers that were funded by
banks who didn’t believe they were lending their own money. Don’t
believe me? Then walkd through the most dense and valuable real estate
in the country, NYC last year – “Who are ya gonna believe, the pundits or your lying eyes?”.
Guess what? The CS index doesn’t capture condos or new construction
sales, both of which are lagging heavily. Just ask the home builders,
some of which are doing much better in the hedge fund business than the
home building business, see More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders.
Much of the foreclosure and distressed inventory came from investors
who walked away from their investment when it became cash flow negative
or sank underwater.
- Guess what? The CS index doesn’t capture investment properties, only owner occupied homes.
A significant amount of the distressed and foreclosed inventory also
came in the form of multi-family housing where the owners overestimated
the ability of rents to keep up with ARMS and then fell behind.
- Guess what? The CS index doesn’t capture multi-family housing, only single family detached/semi-detached housing.
Banks are dumping large amounts of foreclosed inventory on the market in the form of REOs which serves to depress pricing.
- Care to hazard a guess of whether banked-owned REOs are included in the Case Shiller index calcuation?
Many investors have started flipping lower end housing for quick
gains (bought close to wholesale) to retail buyers. These deeds are
often held for a matter of months, if that long.
- Guess what? The Case Shiller index has a minimum holding period to
be included in the index which excludes practically all of these
investor flips, which also tend to double count sales, when in reality
only one real organic sale occurred.
You know, I can go one, but the more swift of you have probably got the message by now…
More on the state of the housing market from yours truly…
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…
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
- advertisements -
Reggie, Good, Articulate presentation.
Reggie,
Please go into greater detail about what was in the earlier story: the idea that soon--if it's not true now--there will be no economic incentive to take title to defaulting homes.
I ask because, since the U.S. has ownership interest in these mortgages, this fact will be counted as policy in litigation. So it matters A LOT if you can say that your client has a Fifth Amendment Due Process right (or third party beneficiary Federal common law right) to a HAMP modification which is in FACT a minimization of the risk of default (not that flaky 31% number) BECAUSE, among other things, the U.S. has no economic incentive to foreclose.
This would impress a Judge A LOT. Judges love FACTS. Go into more detail than you did in that one chart, on why the banks have declining (soon to be no) interest in taking title to defaulting homes.
Since you're not a lawyer, you greatly underestimate the importance of this observation. When the United States has a stake in a matter, facts relating to that matter are imputed to it as United States POLICY.
You are the second lawyer to bring this up, and I now understand the relevance. Give me an email at reggie at boombustblog.com so we can discuss this further.
Thanks again Reggie for your postings.
Valuable when there is so much real estate BS being posted.
Wow on the CS index holes. Gee who woulda thunk we don't have real good metrics to give the public any good visibility on what is really going on. I guess that just creates opportunity for those that take the time to question and do some homework.
I wouldn't characterize what I pointed out as holes. What the CS index attempts to do is to filter out noise in order to capture what the authors probably considered at the time of construction a truer picture of home prices. The only issue is that much of that "noise" is what is contributing greatly to the price movement, hence they are filtering out key portions.
I have great respect for the author's work and any models will eventually fail to fully capture reality.
Nice interview, Reggie. I find you to be one of the most grounded and credible voices I read. I might quibble with the occasional conclusion, but your assertions are always supported by your data. Keep it up!
Just remember that after Joseph-Ignace Guillotin created it in 1791, he became a victim of it.
I would just add that it's important to make the distinction between home prices and home sales. Home prices have really not fallen that much compared to home sales. The total size of the real estate market, ie., the stuff actually getting bought and sold, has cratered about 80% from the 2005 peak and I think still has further to fall as long as the home prices continue to be propped. Here's the CPI adjusted chart for new home sales using median sales price and total homes sold.
http://i55.tinypic.com/2t65t.png
Pretty damn ugly.
Something else I don't see discussed much, is that with foreclosures/distressed sales and all cash sales making up roughly between 33%-70% (depending on overlap between the two) of all sales, doesn't rising prices merely indicate that higher end housing market is now collapsing faster than the rest of the market, as opposed to the sub-prime starter homes?
In my part of the USA, the market is clearing at 1997-1999 prices in arms length sales - not foreclosures or short sales. But we are not in the Case-Shiller Index. Of course local property taxes have not declined to those levels. The national average has no relevance in many locations.
Couldn't agree more. We are not even half-way through this. The market isn't clearing. Too many owners are stuck on the 06 price and haven't made the mental adjustment that the world has changed.
We will be at a bottom in real estate when the man in the street considers it toxic waste. Getting there, but a long way to go. My e-mail is still full of offers from gurus who want to teach me to flip houses. Absurd.
The US Government is propping up the real estate markets, both residential and commercial. This is destroying Government credibility as the Pravda Networks scream all is better. By providing funds to keep builders building, banks from foreclosing, and failed real estate loans from forcing banks and insurance companies into bankruptcy the Federal Government is perpetrating one of the most deceitful hoaxes on the youth of the US. This is causing young successful and well educated "kids" to go out and buy homes at these still inflated prices. This is setting our youth up for 30 years of slavery to the cartel "bankers". Government officials have not figured it out yet, but this misinformation is making their house of cards even more wobbly everyday and a breeze is beginning to blow.
Personally, I plan to start a Guillotine Factory so that there will be a plentiful supply available when the public starts demanding heads.
I love the investment logic based on yields similar to how equity yields now are greater than bond yields so that is a equity buy signal...as the great Hugh Hendry once said this deflationary cycle is about return OF capital and not return ON capital.
At this point, it's obvious to most people that the housing market will continue to fall. Most analysis seems to conform to a drop of 10-25%. The big question is: How can the government interfere with the housing market and what will be the impact? There is no doubt that they will try to step in front of any further decline. I have a feeling that some form of auto-refi will happen. There may even be a lot of support for it if prices drop further.
Very effective interview citing instant statistical data to make valid points.
In my neck of the woods a lot of downsizing is occuring [sq. ft. decrease]. Apparently ,many are losing confidence in price appreciation and elect to huncker down and live within their means---a new long term phenomenon. Others are renting at discount to normal rent/asset value ratios. A 20 year bubble cannot be rectified by lower interest rates although refinancing could ease the pain tempoarily depending on individual situation. Also banks still will have to take a big hit on their books sooner or later. This is just the beginning
Turn it up!
Next time wear a black turtleneck or a suit and tie. You are on TV. Image image image.
And never say um again.
Seriously, take that video to an image consultant and do the necessary Reggie.
william..,
As a potential subscriber to his services, I dont give a tinkers dam about his image.
It was during the 70's but I once met a very wealthy foreign corporate head who came to our facility in his helicopter with 4 armed security guards who dispursed to the four corners of the roof. (That was the period when kidnapping for ransom of people with money was in vogue.) His purpose was to inspect for purchase of the company.
The guy looked like he had stopped at a Detroit getto rummage sale. Dress jacket, tie, shirt and pants all of conflicting colors and obvously no color sense at all.
He came quickly, listened and left-no buy.
Object lesson for me.
Too many clueless suit monkeys on TV already.
I actually like my image. The difference between Reggie and many of the other pundits you may see on TV is that Reggie is real. What you see is what you get. I don't feel the need to dress the part, or play the part, and I don't feel the need to bend the truth or the facts for any particular constituency.
There were a variety of topics to be discussed, and I wasn't sure exactly what topics were to be discussed, but I knew it was going to be on either technology, housing, CRE, banking or sovereign debt. The questions and answers weren't scripted, I had to actually think about them. I knew they were very interested in my housing perspective and I gave them the heads up that I disagreed with a pundit in one of their CRE articles.
Even though I may be biased (being me, and all :-) ), I would much prefer the interview content above as compared to the airbrushed, imaged up, full of fluff, virtually knowledge free MSM content that often passes for "expert interviews" in certain other venues. Then again, I have always been an outsider.
If you are comfortable with yourself (and you seem to be) and you really know your stuff backwards and forewards (you do), then there is no reason to change anything.
People need to value content over image.
Take the constructive criticism. Your interview style/image did not quite match your written style/image. Your writing is confident and backed up. Your interview was a bit meek and hesitant. You could be a TV media rock star if you brush up on interviews to deliver your already good and confident written analysis. Always appreciate your posts, keep up the good work.
Here's some constructive criticism for you: Not everyone on tv needs to come off like a Chase commercial. I would argue that that is part of the larger problem. If people turn themselves into products, they will not believed, for good reason.
great interview and wear what the fuck you want, a suit/jacket is meaningless these days
I agree Reggie. Nice interview! What matters is that you are sincere in what your saying. Keep up the great work! Thanks!
Well done.
+10 for referring to yourself in the 3rd person.
I'm with you, Reggie. Many thanks, & keep up the good work!
Many of us are simply disgusted with the MSM. The lack of challenge from these blow-dried talking heads is doing major harm to our country. It allows the real decison makers to avoid controversy and peddle fiction as fact. I hear both ignorance and outright lies float by without so much as a raised eyebrow every day on TV. Do not get too slick, too polished, or too attached to your "talking points". We have far to many of those folks out there now. Keep it real and let the facts prove the points.
nah, i prefer real.
The biggest problem with the case shiller is that it gives you a figure for TWO MONTHS BEFORE and that just dont work in the current scenario.
I've read every non-subscription blog entry you've posted over maybe the last 9 months.
First time I've heard your voice and seen you besides your headshot photos on your website.
NOt a bad interview at all... but just because we stare at Matt Miller and Carol Massar all workday on mute doesn't mean you can let them eat you up when you are on the telly!
Get your gameface on, strategize your talking points, decide on the level of complexity to give on details of backgrounders for each of your viewpoints, and own the room next time you get invited for an interview.
Most papers and magazines are written at an 8th grade reading level. BloombergTV's daytime audience is not reading at an 8th grade level... you can skip some of the background info if you have concise soundbites to summarize the background... give yourself more time to talk about your own viewpoints and predictions...
My grandmother would tell you to stop fidgeting. BOdy language is important on those tv interviews.
So come on fess up, how pre-structured was that interview? Did they send you over the bullet points before you got to the studio?
refreshing to see you call the numbers for what they are reg. nice presentation.
Middleton really knows his stuff. In fact he's so good that I sometimes have a hard time following him because he throws so much information at you.
More proof from Mr Thompson's Neighborhood...
6/4/07: House sale, $890K - teardown
Developer (a friend) builds a 5,760 sq ft house (heated, 6,700 total), likely at $150/sq ft ($864K). Total is now in the $1.75MM range.
12/22/09; Regions Bank, foreclosure at $1.201MM.
6/17/10: Sale at $995K. Nice 30%+ haircut after RE commissions, mgt fees, legal, etc.
Another in a series dedicated to that mortgage visiuonary, J. Kennedy Thompson of Wachovia.
So you mean appartment prices COULD have gone up and nobody knows about that? RALLY!!!! GREEN SHOOT RUMOR!!
Ultimately housing should be fairly fungible, so all the things you note that are excluded from CS will still effect the price of the houses tracked by CS. Yes condos and house market can decouple a little but they will trend together ultimately. Yes REOs will sell for less per sf than owner occupied houses, but they compete for some of the same buyers. If REOs in decent condition are selling for $150 sf, its not like other houses are going to sell for $300 sf, these markets are not that compartmentalized.
I think the CS tracked houses are good representatives of entire market in the end, its just that exclusions you mention likely effect timing of the indicator, excluding them makes the CS indicator lag, as you note.
Ditto. I have noticed that the forward survey run by Bob Shiller is also biased in terms of time. I have been -10 for this year, am now -8, but am shifting the bearish forecast to 2011-2012 because of the lag in the system between default and resolution -- now two years. The full weight of involuntary sales on overall prices won't be felt until next year. Yikes!
Chris
I'm based in the UK and find it incredible that the US government plays such a large part in mortgages. Here all mortgages are provided by private banks and building societies (co-operatives) and the govt plays no part. Some years ago all tax incentives were abolished and it seems obvious to me that if any incentive is provided it will just push up prices to what people can afford.
Secondly, why the heck have such a convoluted index? how difficult is it to have one list of all properties!!
I think you're right on the lag, even for the ARMS resetting into oblivion as we type, if only because the banks are holding back the inventory for so long.
Yes, you can't pull your demand forward with chicanery and not have a corresponding lull.
Thanks for the analysis on the blind spots of CS and keep the great articles coming, RM.