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After being pummeled with confusing sound bits after the release of Monday’s Pending Home SalesIndex by the NAR and the S&P/Case Shiller Index, I thought it was time to set the record straight on the applicability of this research.
This is my second column for Bloomberg View: Housing Data Is Old and Moldy
My Bloomberg View RSS feed.
Tags: Case-Shiller, Robert Shiller, Pending Home Sale Index, PHSI, S&P/Case-Shiller Home Price Indices, NAR, National Association of Realtors
Joe Weisenthal, Executive Editor of Business Insider, pronounced we’re at “Peak Anti-Homeownership” after reading Barry Ritholtz’ Bloomberg View piece on homeownership a few weeks ago.
Seems like we're at peak anti-homeownership. Good piece by @ritholtz http://t.co/h5SzLyacBt
— Joseph Weisenthal (@TheStalwart) May 7, 2014If financial journalists and housing pundits today truly reflect the US sentiment about housing and homeownership, then we’re clearly manic about our largest asset class.
The conversation by a number of financial journalists and a particular Nobel Prize winning economist has morphed into a homeownership-is-a-false-aspiration pronouncement, almost entirely supported by treating this asset class as a stock. Didn’t we learn the hard way that this was flawed thinking during the prior boom? And unless I’m mistaken, the majority of US homebuyers, aside from investors, used leverage for much of the last 50 years. How about we estimate the ROI on what real people actually do and stop thinking about homeownership as a stock transaction? Good grief.
2012-2013 – Last year’s housing market “recovery” pronouncement was based on nothing fundamental, merely Fed policy of QE and years of pent-up demand released after the “fiscal cliff” came and went without a major catastrophe. Pundits caught up in the price euphoria said the housing market was firing on all cylinders. Yet surging price growth was largely based on sales mix-shifting, less distressed sale buying, tight credit causing, lack of inventory inducing, fear of rate rising, double-digit price growth. Positive housing news was refreshing news to many, but there was nothing fundamental driving the market’s performance to such incredible rates of growth. I couldn’t wrap my arms around 13% price growth with tight credit, stagnant income growth and unacceptably high under-unemployment as economic fundamentals.
2014 – This year’s housing market, which is being compared to the year ago frenzy, is showing weaker results. The housing recovery “stall” is being blamed on the weather, falling affordability and weaker first time buyer activity. This has brought some in the financial media to conclude that homeownership is over rated.
An aside about the weather – a homebuyer last January didn’t say “Gee, since it is 0 degrees outside, let’s cancel our appointment with the real estate agent and delay our home buying plans for 5 years.” Of course not – the harsh weather merely delayed the market for a month or two. However since it hasn’t “sprung back” yet, then clearly there is something else going on besides the weather.
Falling homeownership and anemic household formation is the result of a lackluster economy and a global credit crisis hangover. I can’t make the connection how these weaker metrics have anything to do with a flaw in the homeownership aspiration. Homeownership is falling because it rose to artificial highs (Fannie Mae was shooting for 75% during the housing boom) and is now overcorrecting because credit is unusually tight, the byproduct of a lackluster economy, the legacy of terrible lending decisions and fear over additional forced buybacks of flawed mortgages among other reasons.
I’m quite confident that a significant, sustained economic recovery will go a long way to ease credit conditions and eventually revert homeownership to the mean and we can stop with the “cart before the horse” orientation. While homeownership has never been right for everyone, recent calls that it’s not right for anybody is just as flawed.
Then we’ll pronounce “Peak-Homeownership” in our own manic way.
Tags: Robert Shiller, Barry Ritholtz, Business Insider, Joe Weisenthal, John Burns, peak
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I was speaking at the New York Real Estate Bar Camp recently and asked the audience what to call the state of housing market right now, since I objected to the use of the word “recovery” and “a period of better stats without underlying fundamentals” wasn’t catchy. Philip Faranda came up (more like shouted out) a brilliant suggestion. We’re in a “Pre-Covery!” I loved it and it stuck.
I thought about the new word when I read a great Robert Shiller piece in the New York Times this weekend called: A New Housing Boom? Don’t Count on It.
Shiller questions the substance of the happy housing news we’ve all been reading about:
It’s hard to pin down, because nothing drastically different occurred in the economy from March to September. Yes, there was economic improvement: the unemployment rate, for example, dropped to 7.8 percent from 8.2 percent. But that extended a trend in place since 2009. There was also a decline in foreclosure activity, but for the most part that is also a continuing trend, as reported by RealtyTrac.
What’s missing from all the metrics being tracked and discussed is sharply falling inventory – that’s what is driving prices higher even though little else has changed.
The reason for falling inventory? Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.
Not only don’t many sellers qualify – they simply aren’t under duress i.e. they haven’t lost their job, don’t need to move, etc. so what will they do when they realize they don’t qualify?
Nothing.
They expect/hope hope the market improves eventually.
This has created yet another form of “shadow inventory.”
Although I certainly agree that the long term trend of mortgage rates doesn’t really correlate with housing prices since rates have been falling for years, weak employment and personal income are not justifying the last 6 months of housing market improvement.
I see falling mortgage rates as simply keeping demand steady (but rates can’t fall much further) and falling inventory is either pressing prices higher or to stabilization depending on the market.
Here is a simplistic generic but typical scenario in most of the markets I follow over a 2 year window:
In this scenario the rise in sales is NOT working off inventory – the math doesn’t work so something else is in play – low or negative equity is choking off new listings entering the market against steady demand caused by falling rates.
Since low inventory is not a local market phenomenon but is happening in nearly every housing market I can think of (sales rising modestly and listing inventory falling sharply) it makes this a credit phenomenon. I like to say “housing is local but credit is national.”
To make this discussion really crazy we could even say that tight credit conditions are actually prompting the pre-recovery something that on the surface is very counterintuitive. But in reality, tight credit is choking off supply and low rates are keeping demand constant. Then prices rise.
Tags: Case-Shiller, Robert Shiller
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Last week the Florida’s state Realtor association announced they are developing a repeat sales index for tracking the state’s housing market. NAR is doing the same thing on a national level. My first thought was, huh?
The new Florida Realtors Real Estate Price Index will use data from the Florida Department of Revenue to chart home prices for the state and metro areas during the last 17 years.
Why create yet another housing index?
NAR has been sharply critical of the repeat sales methodology for years – and now to suddenly create one because it works better? Damaging logic and once again undermining NAR’s credibility and branding.
The motivation for the creation of a new index seems to be the popularity of the Case Shiller Home Price Index which has been a thorn in NAR’s side since it was introduced a number of years ago. Ironically, NAR enabled Case Shiller to thrive from NAR’s own inability to become a neutral trusted advisor of the exclusive housing data they publish. The culture at NAR Research enabled the two most recent chief economists Lereah and Yun to consistently interpret the numbers with an almost cartoonish glowing angle that has caused severe damage to the NAR brand.
In other words, Realtors and their associations have long ago missed the opportunity to be a reliable provider of real estate stats, but that’s really ok. After all, the association is a trade group and any stats they produce are, by definition, tainted even if they aren’t. Case in point: NAR just revised their Existing Home Sales stats after data provider CORElogic discovered there was a significant error and pressured them to do a revision. NAR had double counted about 2M sales since 2007.
What is a repeat-sales index?
A repeat sales index measures the difference in price from sales that recently sold and their prior sale. New development is omitted because those units have never sold before – a huge characteristic of the Florida housing market. Of course if the property was gut renovated, doubled in size, torn down and rebuilt, a repeat sales index does not know this. A repeat sales index is also subject to the same skew in housing type that a hedonic (i.e. Existing Home Sales) index is and is therefore adjusted using varying formulaic methodologies.
A repeat sales index does not reflect true seasons in housing. Yes there is a nominal difference between their seasonally adjusted and non-seasonally adjusted trends, but it does not show the spring rush and winter doldrums as they actually occur. There seems to be a need by economists to show a steady line rather than a seasonal visual a consumer would better understand.
Whats wrong with the Case Shiller Index?
I’ve been quite critical of the Case Shiller Index since I began this blog in 2005 namely because:
I do admire Robert Shiller and Karl Case as pioneers in this field but the CS index was NEVER intended to be a consumer tool used to measure housing. It was meant to be the basis for allowing Wall Street to hedge the housing market. A logical goal indeed, but CS was conceived before it was feasible to “game it” i.e. many economists and analytics firms can now accurately project the results of the index in advance. Not a good thing for investors who want to bet on it which explains why such limited trading actually occurs.
There are a lot of housing indices these days. There are also many new data companies that can do analytics a lot better than Realtors can because they only do analytics for a living. Without neutral commentary, how do more housing indices by NAR or Florida’s association make the picture any clearer to the consumer (and Realtors)? Instead I think the Florida association should be focusing on ways to help their members be more successful.
Case Shiller Index [Standard & Poor’s]
Existing Home Sales [NAR]
Florida Association of Realtors [Home Page]
Tags: Case-Shiller, Florida Association of Realtors, Robert Shiller, NAR, National Association of Realtors
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I have been coming across what I believe to be somewhat weird rear view looks at the credit/housing bubble we just went through from some well respected voices. I’m thinking there is perhaps an academia disconnect from the front lines.
[click to open article]
Casey B. Mulligan is an economics professor at the University of Chicago writes “Was it really a bubble?“
According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.
But why would the blue line need to be where it is? Housing prices are stickier on the downside and the slope should not form a bell curve as the drawing suggests. It should be a lesser slope and drawn out over several years, shouldn’t it? And wasn’t that the whole point of the stimulus plan in reference to the first time home buyers’ and existing homeowner’s tax credit? It stimulated sales activity and as a result, artificially pushed sales price levels sideways.
Take a look at my colleague at Westwood Capital, Dan Alpert’s chart showing the exuberance of housing prices. You can slice it and dice anyway you want but THAT’s a bubble.
[click to open article]
And one of my favorite economist/writers Edward Glaeser writes “What Caused the Great Housing Maelstrom?“
If the easy credit hypothesis is correct, then we can take comfort in the thought that we understand the great housing convulsion, and we can start pointing fingers at those institutions, like the Federal Reserve System, that play a role in determining interest rates.
He and his colleagues through their research seem to be saying that low interest rates and high lending approval rates don’t explain enough of the rise in housing prices.
In all due respect, I don’t know exactly how they proved their points empirically but this research seems to be a bit disconnected to what most of us observed on the ground during the boom itself.
For example, a five percent increase in loan-to-value ratios is associated with a 2.5 percent increase in prices, and loan-to-value ratios rose by less than five percent during the boom.
That seems like a very low ratio to me. As appraisers we could clearly see the pressure we were under to hit the number for the mortgage approval and that most people were placing 5%-10% down. I contend that credit was easier than anytime in modern history and that combined with interest rates kept on the floor from late 2001 to mid 2004 caused a frenzy of demand or as Professor Robert Shiller characterizes it as “Irrational Exuberance.”
This was a credit bubble and that housing was merely a way to keep score. Perhaps I am not following their logic but having lived through it and saw the lending environment first hand, its hard to imagine this whirlwind of the past 7 years was not a bubble of some kind.
Tags: Case-Shiller, Robert Shiller
From the Case-Shiller Index Report released today:
“For the second month in a row, we’re seeing some positive signs,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The U.S. National Composite rose in the 2nd quarter compared to the 1st quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-City and 20-City Composites posted monthly increases, as did most of the cities. As seen in both seasonally adjusted and unadjusted data, as well as the charts, there are hints of an upward turn from a bottom. However, some of the hardest hit cities, especially in the Sun Belt, show continued weakness.”
The press release has the monthly 10/20-city, quarterly 10/20-city and national index with monthly and year over year data and references to month, quarter and year are all interspersed so its tough to follow.
Here’s what it looks like – The 10-City and 20-City Composites recorded annual declines of 15.1% and 15.4%, respectively. These are also improvements from their recent respective record losses of -19.4% and -19.1%. The 10-City and 20-City Composites posted their second consecutive monthly increases. Both indices were up 1.4% in June over May, and up 0.5% in May over April. Eighteen of the 20 metro areas saw improvement in their annual returns compared to those of May. Looking at the monthly data, the same 18 metro areas reported positive returns in June.
For the national composite, housing prices rose 2.9% from Q1 to Q2 and fell 14.9% from the prior year quarter before seasonal adjustments.
In other words, the indexes show improvement in the short term.
Shiller notes a change in mindset:
“The animal spirits seem to be coming back,” said Robert Shiller, Yale economics professor and developer of the Standard & Poor’s/Case Shiller Home Price indexes. “The psychology does seem to be changing.”
But Shiller is cautious about the good news:
“The really important things [affecting home prices] are unemployment and momentum,” said Shiller, who is a Yale economist. “We have momentum, which is very important, but we also have high unemployment.”
And, he added, “the government has not yet handled the foreclosure problem.”
Tags: Case-Shiller, Robert Shiller
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| The Daily Show With Jon Stewart | Mon – Thurs 11p / 10c | |||
| Home Crisis Investigation | ||||
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Hat tip to Trulia Blog. This is LOL.
Tags: Robert Shiller, The Daily Show, Jon Stewart, Tim Geithner
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Everyone is out there talking about where we are and where we seem to be going. One thing that is rather striking is the lack of spin relative to a few years ago – surprisingly refreshing.
Here’s a few notable individuals’ takes on the-state-of-where-the housingmarket-economy-is-at-right-now.
Pope Benedict XVI (Yes, the Pope): The “economy of communion.” ahem…amen.
The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centered. Today we hear much talk of ethics in the world of economy, finance and business.
Allen Smith, CEO Prudential Real Estate Investors: Confluence Of Indicators. Here’s the podcast.
Some have spoken about deleveraging. Some have told us about the shrinking of values. Others have said it’s a confidence game — as in, there isn’t any.
William H. Gross, Managing Director, PIMCO: “”Bon” or “Non” Appétit?” I always have to re-read his columns a few times to follow, because the nuances in his delivery are staggering.
Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S.
Robert Shiller, Professor of Economics, Yale University:“Bob Shiller didn’t kill the housing market”
When the June Case-Shiller figures were released, he said they showed “striking improvement in the rate of decline.” Asked to look ahead, he says, “My guess is that prices will continue to fall for a while, but at a slower pace, and then stabilize. We’ve become very speculative in our attitude toward real estate, so there could be another boom. But if so, it likely won’t happen for another five to 10 years.”
Tags: Case-Shiller, Robert Shiller
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Podcasts
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Podcasts
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Professor Robert Shiller took time out from his busy schedule when he was in New York to pay me a visit and let me interview him for The Housing Helix Podcast.
I invited him after I read his recent Op-ed piece in the New York Times, Why Home Prices May Keep Falling.
Dr. Shiller is well known for many things, including his New York Time’s bestselling book: Irrational Exuberance and his widely referenced monthly state of the housing market tool, The Case-Shiller Index. But he also continues to write about the housing market, having released two books over the past two years:
Last year’s The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It
and this year’s
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
I hope you enjoy his insights.
Check out this week’s podcast.
You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.
Tags: Case-Shiller, Robert Shiller, Sub-Prime
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Source: Portfolio.com
Professor Robert Shiller, a lightening rod of public discourse concerning anything housing, largely due to it’s emotional nature, pens an excellent piece in the New York Time’s Economic View column this weekend called Why Home Prices May Keep Falling.
This seems fly in the face “glimmering hope” and “green shoot” discussion beginning to emerge in the real estate conversation this spring as seasonal market forces took hold.
Heck, anything was better than last fall.
Apparently the federal government, via the famed “stress tests” doesn’t see housing prices stabilizing anytime before 2010 – makes sense since unemployment is projected to continue to increase through the end of next year, assuming the recession ends in 2009.
He frames the conversation around the fact that falling housing prices defy investment logic. That is:
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.
He reiterates what people in the real estate business know to be true…
But something is definitely different
about real estate.
We still have excess supply, which will likely take a number of years to be absorbed even after the economy begins to stabilize. His reference to the 1990-91 recession resonated with me. Once it ended, housing prices didn’t stabilize for another four years.
In other words, housing markets are cyclical and housing markets are seasonal. That’s not a bad thing.
Tags: Robert Shiller
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You’ve got to admire people that go out on a limb and call a market as a contrarian and turn out to be right. It’s a lucrative opportunity for those that are able to monetize it.
There is a lot of discussion lately about a slower pace of decline and that the end may be within the few years. The recession is expected to end at the end of this year and unemployment is expected to top out in about 18 months. In other words, there is plenty of room in the tank for financial opportunities for negativism.
Some notables who seem to continue to do well are:
The Housing Bubble Blog and others like it were screaming that the bubble was going to burst. They were right, despite all efforts by NAR to keep them in check. Ben Jones is one of the most prolific content posters and has the gold standard blog name for the subject. I’ve linked out and have been checking in with his work since late 2005. Although he is a free lance writer, his content appears to be collected by copying full articles from primarily newspapers and magazines around the country – with little or no analysis. Yet he’s consistent and finds a broad array of the key articles of the day. He still attracts hundreds of commenters on every post and all kinds of theories and ideas are shared. He takes donations and has banner ads. He’s created a grass roots feel.
But site traffic is down by more than half over the past year. Are people tiring of the negative?
Professor Robert Shiller, who is a very nice person and has published some terrific work on the wealth effect, economic psychology to name a few, was able to capitalize on the contrarian perspective with his book Irrational Exuberance and the subsequent update to include housing. He called the NASDAQ and housing market bubble correctly and has since released two additional books.
According to Shiller we are looking directly in the face of an enormous “speculative bubble” and the question is not whether stock prices will fall but when!
He tirelessly promoted the S&P/Case Shiller Home Price Index which has become the defacto standard for housing indexes by virtually all news outlets and economists. Despite his efforts and those of S&P, the trading markets for which the index was created, has yet to gain significant traction.
Nouriel Roubini, economics professor at NYU who is also known as Dr. Doom, has been spot on in his calling of the housing bubble. He was so blunt and negative that he quickly gained many detractors.
By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog.
I’ve heard his consulting firm RGE Monitor is doing well but I have no way to confirm.
When he spoke at a convention in New York, several people quipped to me that they needed to jump out of a window because the world was ending.
Roubini was known to be a perpetual pessimist, what economists call a “permabear.”
He’s been hard to find fault with, and he fights with Jim Cramer calling him a buffoon. His recent opinion piece in the WSJ called We Can’t Subsidize the Banks Forever was strong, yet was also called to task for misquoting the IMF.
However this info was just released which makes Roubini right once again::
Regulators have told Bank of America that the company needs to raise roughly $35 billion in capital based on results of the government’s stress tests, according to people familiar with the situation.
Thus, I answered my question. The gravy train for pessimism is still in the station.
Tags: Case-Shiller, Robert Shiller, CNBC
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Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts. He holds the Counselors of Real Estate (CRE) and Certified Relocation Professional (CRP) designations. He is an Appraiser “A” Member of the Real Estate Board of New York and a member of Relocation Appraisers and Consultants, Inc.
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