Wednesday, November 28, 2012

Case Shiller Growth down 60%



Case Shiller quarter to quarter growth down 60%
Case Shiller’s 20 city index grew at 1.1% in the third quarter vs. 2.8% in the previous quarter.  This appears more pessimistic than Case Shiller’s announcement that growth compared to the prior year is up 3.6%. What they don’t say is that 3.5 percentage points of that growth was in the first and second quarter as prices surged in response to an increase in FHA loan limits. 
The chart below illustrates the monthly change in the Case Shiller index.  The November report for September contains prices that were agreed to in July.  The reporting lag is long enough to forget what happened when the commitments were made.  This graph dates from when the price was accepted.


Source: Case Shiller
FHA loan limits were scheduled to return to the pre bubble level in October 2011.  As October approached buyers and sellers rushed to close while FHA financing was available with the higher maximum, further lowering prices.  Lobbying by real estate interests not only succeeded in reinstating the $729,750 loan limit, but also increased the limit in the lower priced regions by 10 Percentage points to 125% of the median regional home price in November. 
Because Prices fell in the fourth quarter 2011 reporting period, the Case Shiller comparison to prior year will continue to increase even as the monthly growth deteriorates.  Case Shiller recommends comparing its index to the prior year, contending that the seasonally adjusted index is misleading.  It is.  Working with seasonally adjusted data brings up unexpected problems and unpublished adjustments, but as this example demonstrates, if you understand monthly data, it is possible to understand price trends. 

The Case Shiller 20 city index is reasonably accurate, but unrepresentative of the national prices.  House prices in these cities are more than twice the national level.  While the Case Shiller Price index declined 34% since the peak in 2006, prices outside these regions declined only 13%.  As the reaction to the FHA limits wares off the monthly Case Shiller data are likely to resume its decline while in less urban areas prices will continue to increase.  Since the Case Shiller cites have so much of the nation’s housing wealth this will be a drag on the economy.  


Monday, November 12, 2012

Housing has recovered but Case Shiller index will fall



Case Shiller index monthly trend 
Case Shiller recommends comparing its index to the prior year, contending that the seasonally adjusted index is misleading.  It is.  Working with seasonally adjusted data brings up unexpected problems and unpublished adjustments, but as this example demonstrates, if you understand monthly data, it is possible to understand price trends.  The October Case Shiller data covers August house closings but the bulk of the contracts were agreed to in June.  The chart below illustrates the monthly change in the Case Shiller index. Prices increased in December 2011 and rose to a peak before falling off in the last two reporting periods.




Source: Case Shiller
The reporting lag is long enough to forget what happened when the commitments were made.  FHA loan limits which were raised to a maximum of $729,750 to ease the housing crisis were cut to the normal level of $625,000 on October 1, 2011.  As October approached buyers and sellers rushed to close while FHA financing was available with the higher maximum, further lowering prices.  Lobbying by real estate interests not only succeeded in reinstating the $729,750 limit but also increased the limit in the lower priced regions by 10 Percentage points to 125% of the median price on November 18, 2011.  
The prices rose in reaction to the easier financing but that is wearing off.  Prices outside the Case Shiller stabilized and should continue to rise. The Case Shiller cities are well above the start of the bubble and they are likely to resume falling.
The Case Shiller 20 city index is reasonably accurate, but unrepresentative.  House prices in these cities are twice the national level.  While the Case Shiller index declined 34% since the peak in 2006, prices outside these regions declined only 13%.  The Case Shiller National index contains only urban areas so it is meaningless. Data from Federal Housing Finance Administration (FHFA) index for the 20 Cities matches closely with the Case Shiller index. The reason for the differences in the indexes is that they cover different geography. The performance of regions outside the Case Shiller is determined by weighting this index by percent of national housing and subtraction it from the FHFA index.    This is illustrated below.

 The Case Shiller 20 City markets responded to the combination of the $8,000 house purchase credit and higher loan limited begun in 2009 and 2010 and to the expanded loan limits in 2011. Housing markets outside the Case Shiller 20 cities bottomed out in the second quarter of 2011 and they are recovering.  These markets are less than half the price of these and much more stable.  The lower priced cities in the Case Shiller index are also recovering.  The housing bubble differed sharply by city as housing cycles do, and the recovery will too.   Most of the more expensive Case Shiller cities still face major declines as the effect of the higher loan limits wares off.