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Real Estate Mania: Bears vs. Bulls in a City Near You! August 31, 2009

Posted by John Watch in AccuriZ News, News Feed.
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 Main Event: Bears vs. Bulls- The Housing Market Bottom Match 

 Real estate is Seasonal, Cyclical and Emotional, and the emotions are running wild at the moment.  Home prices are up, sales are increasing and the reports are presenting “good news”.

The “mania” of real estate predicting and forecasting is beginning to pick up as the summer selling season comes to an end, with hints of promise starting to appear in the housing market.  After a grueling Housing Bust that left the economy severely damaged, property data analysis statistics collected from public records now show signs of recovery.  

Both the Bears and Bulls have been fighting it out, relying on the training method of the S&P/Case-Shiller Home Price Index.  The Bulls are starting to swing away, indicating a sign to the return of the boom days of old.  The Bears are ducking the punches citing the lagging, inadequate property data analysis in the Case-Shiller Index as a sign of caution.

The stage for the Housing Market Bottom Showdown is set, with the American public’s perception of the market at stake.  Leaning too far to one side could mean a repeat of the 2006 Bust.   Are we to believe that we are on the verge of a turnaround, or do we still need to be patient?  We will take a look at the supporting arguments from both corners, which are based on the Case-Shiller Index and determine the best judgment for the public moving into the winter months.  Here’s the tale of the tape.

Home Prices on the Upswing from CNNMoney.com:

Packed with quotes of “positive signs” “great news” and “booming” about the Index, the optimism is rampant.  It goes on to say that an area in Los Angeles had “booming” home sales again.  Looking at the 20-city index below, L.A. had 0% change from Q1.

Is that really a boom?  The American public needs real facts, not fluff.  The following table is extracted from CNN.money.com:

CaseShiller2Source:S&P/Case-Shiller Home Price Index

Year-over-year, EVERY city is still negative, with 15 cities negative over 10%.  The talk of “shadow inventory” further depreciating the market crept in as well.

It has been noted before that Case-Shiller Index probably over weights foreclosure sales (Reported by AccuriZ and NewsnEconomics).  Foreclosure-metro areas have been more heavily weighted, dragging down the overall value of the Index.  Does it seem logical that financial institutions would dump houses on the market, knowing that such actions would further deflate property values?  There are duplicate and triplicate recordings of foreclosures out there; thus distorting the actual count of properties in foreclosure.

Asking the important question: Would you sell in a down market?  It seems to have more common sense than the confusing and contradictory analysis of the sales data presented by Case-Shiller.  Letting the market stabilize will enable mortgage servicing companies to come to terms with existing owners.  The AccuriZ Mortgage Assistance Program also provides a solution to this problem.

The article ends with this quote from Mr. Shiller, “I have found that momentum matters,” he said, “and this is a sudden break in [downward] momentum.  The [market] psychology seems to be changing.” 

Advantage: BEARS- Who do we trust

It’s Time to Call the Housing Bottom: 95% of Case-Shiller Markets Show Home Price Improvement from TheMortgageReports.com

Source: TheMortgageReports.com

Improved by how much? 10 of the 20 markets listed are bordering the 1% line.  Considering the margin for error, 1% is a meaningless number.

The article then proceeds to list 3 reasons why the Case-Shiller Index is imperfect:

  • It’s limited to 20 U.S. cities, representing just 9% of the U.S. population
  • It’s on a 2-month lag, reflective of how housing was, not how it is
  • It ignores locality, grouping city neighborhoods into one big lump

 So if it’s “time to call a housing bottom,” what other data is being used (besides the imperfect Index) to make this claim?

Admitting that the Case-Shiller Index is imperfect is one thing, but using that same imperfect data (with no other visible sources) to create a market forecast is completely another.

Many reports have economists using the skewed data of the Index to captivate headlines and bolster their own personal agendas. When not weighed against other sources of information, the Index is questionable in determining a forecast.

Real facts about property data are needed to determine the current state of the market. This article ends by pressing people to buy now with contact information for a pre-approval letter.

Advantage: BEARS- Incomplete data means caution

Why It’s Hard to Tell If Price Gains Represent a ‘Turning Point’ from Wall Street Journal (WSJ.com):  First, the article states that Mr. Shiller noted the recent index “may be turning point.”  In next sentence Mr. Shiller is quoted saying, “It really is too soon to call this as a turning point.”  Wait… what?

Later, Mr. Shiller expresses “great reluctance” in forecasting market prices. But this is exactly what transpires as economists make predictions solely based on the Case-Shiller report.

For example, later in the article housing economist Thomas Lawler notes that “the price index should keep gaining in the coming months” in the next paragraph.  Based on what?  What are we supposed to believe?  The reason why it’s ‘hard to tell’ is because everyone has a different interpretation without providing the facts.

It ends with this quote from Lawler, “Indeed, the [index] is almost certain to continue increase over the next few months.  After that, who knows?” said Mr. Lawler.

Advantage: BEARS: Too confusing to pinpoint.

Housing Market: Looking Better, But Still Troubled from Time.com:  Using more than just the Case-Shiller Index, this article notes looking “behind the headline” to see that the “sector is still fragile.”  It looks deeper into the property data to see that the low- and mid-tier homes are doing better than more-expensive homes. Once again we see that Square Footage Matters! (Reported by AccuriZ). In a recent Manhattan Condo report we predicted stabilization by Q4, based on square footage;

 Source: AccurZ.com

Also, noting that data on new-home sales like the Index are “notoriously imprecise and volatile,” the article states that “new home-sales are best looked at over five or six months.” So what is the real benefit of these Indexes? 

The Time.com report even stated that the margin of error on one particular Index was plus or minus 13.4%.  With that said who really benefits from this information?

The article ends with, “We’re now moving forward, and even though it looks like we’re doing that in a positive way, there could still be more plot twists ahead.” 

Advantage: BEARS

So how do they match up for the American public?  When the match is based on one specific source of data that has been historically ineffective, no one wins. The Bulls emotions are high right now, but as the emotional sector dies down – and foreclosures, unemployment and a housing oversupply (in the AccuriZ Housing In Crisis report) start to do damage in the later rounds – the Bears’ perspective might take control.

Again, Real Estate is Cyclical, Seasonal and Emotional.

Time and Patience are the elements that work to everyone’s benefit.  While things are looking better, we still have some time to heal.  Incomplete data analyses that rely on public records and outdated property data from certain regions of the country have little impact other than stirring up the emotional sector of the market.  A level of confidence needs to be balanced with a level of cautiousness, as quarterly reports and month-to-month gains are not enough to be deciding factors in a market forecast. 

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S&P Case-Shiller housing index probably overweights foreclosure sales July 9, 2009

Posted by John Watch in News Feed.
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“What I notice is that the sales pair counts are becoming increasingly weighted toward the biggest bubble – i.e., foreclosure – metro areas: LA, San Diego, Phoenix, etc. Sales in these areas are really dragging down the overall value of the index. Presumably, the foreclosure sales are weighted less heavily, but it is somewhat suspect to me that the share of Phoenix’s housing market, for example, has increased its share of pair counts by 8.7% over its sample average, 5.4%.”

We agree with Rebecca Wilder.

In her July 2 article, Rebecca discusses the S&P Case-Shiller index and how it could be potentially creating a foreclosure bias when weighting its 20 city index.

Thank you, thank you!

We have been analyzing the Case Shiller data for years and as you have indicated very concisely, the index does have a potential for bias.

Your direct comment about Phoenix and Arizona hits the mark. Case Shiller refers to the overall sales price and does not consider the fundamentals of the sale price such as square footage, age of home and land area. Nor, in our opinion does it recognize the weight of the general population size to sales activity size.

Based on property data and public records, our analysis indicates that the price decline, if developed on a sales price per square foot basis, is not as drastic. Furthermore if you establish a weighting influence for the impact of foreclosures, the decline would be even less.

Maricopa County (Phoenix) had a study completed to determine the influence of foreclosures for assessment purposes. This report clearly shows a differential of 10% to 15% (depending on level of foreclosures). This report is based on the sales price per square foot. So if 1.5 million homes in the 5th largest city are valued recognizing these influences, why isn’t Case Shiller recognizing this.

Many will argue that foreclosures are market value and hence are the market. In my opinion this is not true. Yes foreclosures influence the market, but adjustments must be considered for these sales under market conditions and financing in an appraisal.

In addition to your comments on all of the regions, I will clearly state this: More weight should be developed based on the general population of properties, not the sales activity alone.

Kudos’s for pointing this out. Case Shiller represents two-thirds of the housing market? Well what is it leaving out? An index that tracts Metro Market should be based on a consistent parameter (say 60 mile radius) and it should identify the total properties covered, residential properties and annual sales activity. This index should also categorize properties into groups. I find it very difficult to accept that a 1,000 square foot house has the same economic and demographic buyer as a 2,500 square foot house.

Yes, I understand the need for a general overview, but the resources exist for a more expansive index and it should be developed. This is no easy task. Our current property data tracking covers 45 million properties versus Case Shiller at 70 million. Our analysis clearly indicates that Case Shiller, while being a benchmark is not a true indicator of the overall market.

Based on this past real estate crisis, we simply cannot afford to use indexes that lack total coverage and stratification levels which will enable financial institutions, realtors, builders and the general public the ability to understand a very complex financial market.

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Home Prices: Are We There Yet? – Realty Check with Diana Olick – CNBC.com July 1, 2009

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Home Prices: Are We There Yet? – Realty Check with Diana Olick – CNBC.com

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Seeing that there is at least someone out there who has the sense to dig deeper than the broad generalization of most property data reports that are being released, I decided to link this article for you to check out.

Here’s and excerpt from the article:

“A lot of folks are parsing the latest S&P Case Shiller home price report out today, and debating whether some month-to-month increases are proof of home price stabilization nationwide. I frankly think it’s impossible to say anything nationwide, because a lot of different markets are reacting very differently. That may seem an incredibly prosaic thing to say, but I think an awful lot of smart folks often lose sight of that.” – Diana Olick

Home Prices Down 18.1 From Last April: Case-Shiller June 30, 2009

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Home Prices Down 18.1 From Last April: Case-Shiller

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Several recent comments regarding the availability of financing have emerged over the past weeks discussing mortgage rates and the ability to sell/buy real estate. Contrary to popular belief, mortgage rates have more to do with the long term debt obligations of the United States, than the current value of real estate. A review of 30 year T-Bills indicates a concern of investors regarding the debt the United States is taking on. This is also reflected in the value of the American dollar, which has declined over the past several months.

In regards to mortgage financing, the markets did not stop; instead the markets went back to operational practices of 2002/03. The United States housing market is on track to sell over 4 million properties this year and the mortgage industry is on track to refinance double that number of properties. This represents about 12% of the residential housing market (4% sales and 8% refinancing).

Homeowners are receiving financing, but not necessarily at the numbers they had hoped for. Secondly, public records show that property values are down because of the median sales price. The much discussed Case-Schiller Housing Index does not place a relationship of sales price to the size of the home.

Now many economists and bloggers will state that there is no relevance in Sales Price to Square Footage. Based on property data, we state that there clearly is: Square Footage does matter.

In studies just completed, 15 of 20 major metro areas have experienced a decline in sales price compared to last year and to 2006. But the properties being sold are also smaller and by as much as 15% to 20%. As such, the decline in actual value is not as severe as reports that only analyze the Median Sales Price indicate. The real estate market is not absolute. The base data from 2006 is different than the data from 2009.

So what is the real decline in housing values and what is the real erosion of the under lying housing market? Well it depends on if you do the research or if you are an investor looking to snap up properties at bargain basement prices because incorrect information is being fed to the masses.

Conducting comprehensive research takes time and money, but many of the comments I read just rip into the process, as opposed to trying to understand the process. The markets are in flux and need some clear direction, but if we continue to post inaccurate information we will not see a housing recovery take foot for months.

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Housing index declines in June | The Real Deal | New York Real Estate News June 16, 2009

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Housing index declines in June | The Real Deal | New York Real Estate News

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No one should be surprised by statistic for the Housing Index decline.  Based on reports from the National  Association of Realtors, property data and public records from other sources such as Commerce and Bureau of Census, sales transactions appear to be increasing for the first and second quarter.  This upward tick should be expected because the Spring/Summer season always shows an increase. 

While this does not indicate a reversal in the current crisis, it does indicate the potential for market stabilization.  Additionally, it appears that the decline in housing is attributed not only to the oversupply in housing, but it is also attributed to smaller homes being sold versus larger homes during the peak.

Housing in Crisis  discusses the surplus housing situation and the impact on property values when we compare Median Sales Price Per Square Foot historical trends.  There is no doubt the market is correcting itself, but we need to compare Apples to Apples, not Apples to Oranges or Pears or Bananas.

A full recovery will not occur until the surplus housing crisis abates and this most likely will not occur until 2011 or 2012.  With over 3 million excess housing units it will take no less than three years for the natural cycle of population growth to absorb these excess units.  By analyzing the actual data, not estimates one can evaluate market conditions in a more objective manner.