Wednesday, November 27, 2013

Linear trend line indicates 2014 house price decline



The Case Shiller data released on November 26 is based on September closing prices negotiated in July.  Because the Thanksgiving report covers deals negotiated on the 4th of July the current inventory levels and mortgage rates have no impact on them. Prices in the three California cities (Los Angeles, San Francisco, and San Diego) grew at an annual rate of 38% in April but are now growing at 16%.  Prices in the 20 city index grew at 13%.  The growth in the current reporting period came from large cities where prices tend to be stable.  If three stable cities did not grow at an increased rate last month the index would be flat.  These cities are New York, Boston and Detroit. (The Detroit suburbs are growing nicely.)  This growth pattern is unusual.  Next month will tell whether this growth was caused by buyers rushing to avoid the possibility of future mortgage rate increase.   It is likely at a trend line calculated with the next month’s data will be more negative 
A trend of the last 5 months is shown below. The Three California cities trend is converging with the 20 city trend.  The trend line for the 20 city index results in a decline at of 13% by yearned 2014. The average decline for 2014 reporting would be 7%.  This is illustrated in the graph below. The monthly scale is based on the month of closing, not reporting.



Source: Case Shiller
Historically in regional housing cycles a contraction would end with the prices adjusted for inflation back where they were at the beginning of the cycle. California and most other cities in the Case Shiller index are above that level. Low interest rates and FHA financing with as little as 3% down have kept these prices above the historic levels.  The surge in prices is an example of Fed Governor Jeremy Stein’s warning about the risks chasing higher yield
Prices were declining in 2001 in the current case, higher FHA loan limits were reinstated, increasing prices beginning in November 2011.  This surge died off in May 2012 but then the lower mortgage drove the prices to the peak seen in March.  Prices have been falling because investors’ appetites dropped as rising house prices made single family homes less attractive, partially in California. The price swings reflect an unstable market in Metro areas.  FHFA prices which are more reflective of the national price grew 8% in the third quarter compared to 11% in the Case Shiller.  Most areas outside the Case Shiller index have prices that are where they were in 1997 adjusted for inflation when the bubble started. These prices will be stable. That cannot be said most cities in the 20 city index.

Wednesday, October 30, 2013

How Higher Mortgage Rates Increased House Prices




Higher mortgage rates lower house prices not increase them, but this month is an exception.  The Case Shiller 20 City August closing data released on October 29 is based on June price negotiations.  The 30 year mortgage rate began to increase in June, up 0.5% from the previous month to 4.1%.  But after falling 70% in the previous 4 months, prices went up from an annual rate of 7.5% to 11.8% in the June negotiations.  This is illustrated in the graph below.  The most likely explanation is the rush to buy before mortgage rates go even higher drove prices higher.  


The Case Shiller year over year comparison is up 12.8% - a six year high. If the monthly increase next month remains the same as this month’s 11.8% annual rate the year over year will be 13.2%.  If it drops to the last months 7.5% rate it will remain at 12.8%.

The mortgage rate for July negotiations will increase by 0.3% to 4.4% so there could be a similar increase next month. That should be the end of price acceleration.  The higher mortgage rates will add to the down ward trend so prices will be falling by the January 28 report. 

Monday, October 14, 2013

Collapse of S&P Homebuilders ETF



Case Shiller’s 20 city year over year index is the most widely followed indicator of housing strength. The SPDR S&P Homebuilders ETF has followed this indicator more than doubling in the last two years. Both the Case Shiller and the Homebuilders ETF have plateaued.

The Market does not understand the two weaknesses of the Case Shiller data. 


  •   The higher mortgage rates are not in the data yet.  Prices announced at the end of September are for July closings which were negotiated in May, The 30 year mortgage rate in May was 3.5%.  The current rate is 4.5%. The impact of the higher mortgage rates will not appear until next month’s report on June negotiations which were driven by a half point rise in mortgage rates.
  • Price increases in the latest Case Shiller report are down to a rate of 8% per year in July closings from 23% in March.  A trend line using the last four months data produces a 3% price increase next month and a 2% annual decrease in the data released on November 26.  These numbers do not include the effect of the higher mortgage rates so the actual data will be even lower.


More information on the monthly price trends is in the September 25 post: (House Prices tracking to decline in two months), at housingcycles.blogspot.com.

The ETF Homebuilder index contains home builders, building products manufacturers and DIY retailers.  A building products company with a branded product will be hurt much less as will the retailers because the remodeling market is more stable than new construction and provides better margins.
   
Robert Shiller deserves his Nobel for his excellent work on bubbles, but not for the Case Shiller index. He also showed good judgment in passing this index to S&P who focused on the yearly data which masks all the monthly trends data building an undeserved confidence. However the investor who relies on this misleading index will not get a prize.  But then many feel that two out three winners isn’t bad.   

Wednesday, September 25, 2013

House Prices tracking to decline in two months



Prices increases in the latest Case Shiller report are down to a rate of 8% per year in July from 23% in March.  A trend line using the last four months data produces a price decrease with the September data.  The year over year growth that Case Shiller emphasizes, shows a 12.4% increase, but this misses the increase from a 5% growth in June 2012 to the 23% peak.  The chart below demonstrates the risk using a 12 month average to project data that has grown rapidly and then collapsed.  Monthly data has embarrassing quirks but it is the only reliable approach.  
 
 
Prices in the more expensive markets are declining more rapidly than the 20 city average.  These markets are more volatile... They went up faster in reaction to higher mortgage rates and they will come down faster.
It is common to talk about higher mortgage rates causing prices to grow more slowly.  However the following chart demonstrates that the impact of higher mortgage rates has yet to hit. The July data is based on May price negotiations.  The 30 year mortgage rate in May was 3.5%.  But the current rate is 4.5%. The impact of the higher mortgage rates will not appear until next month’s report on June negotiations which were driven by a half point rise in mortgage rates. Since the trend lines do not include the impact of higher mortgage rates the decline in price will be greater than indicated above.
 In the current case, higher FHA loan limits were reinstated, increasing prices beginning in November 2011.  This surge died off in May 2012 but then the lower mortgage drove the prices to the peak seen in March.  The surge in prices is an example of Fed Governor Jeremy Stein’s warning about the risks chasing higher yield. Prices have been falling because investors’ appetites dropped as rising house prices made single family homes less attractive.  Next month the higher mortgage rates will add to the downward pressure on prices.




 
The Case Shiller 20 index highlights the surging prices in expensive markets. Media coverage of the hot markets leads to higher price expectations in other markets. The more expensive markets showed a greater response to FHA loan limits, house purchase credit and other programs.  The California market has a long history of booms and busts.  Buyers remember the peak and believe that these prices will return.  With some good news the price stampede will begin. 

Case Shiller is weighted by housing value. The 3 California cities make up 27% of the index and 12% of U.S. housing value.  Despite the headline grabbing California growth, price increases differ sharply by city. Phoenix grew faster than California in January at an annual rate of 27%.  It declined for the five straight months to 11%. The four cities that were the most stable during the bubble grew in July .by 7%. 

The following Chart illustrates the relationship of Case Shiller 20 city and national to housing outside the Case Shiller cities (called Heartland). It represents 75% of the housing stock and is drastically lower priced.  Inventories are over 10 months of sales.  Prices outside the Case Shiller grew at only 5 %.    The national inventory is 9 months vs. 3 to4 in California, and 7 months in the Case Shiller. The June national annual price increase is 9% per the FHFA purchase only index.





Increases in markets such as California are not driven by fundamentals. But price trends are predictable. The decline from the peak of the Bubble in 2006 until federal programs were launched in April 2009 correlated with the price growth in the expansion and personal income at 92%. 

Prices can be expected to turn negative and some Case Shiller cities will be particularly hard hit.  Mortgage rates FHA loan limits and other government programs drive activity in expensive market while they have a lesser impact on lower pieced Heartland regions.  The hot markets will resume   declining to a long term sustainable price level.

Wednesday, August 28, 2013

House Price Increases Cut in Half in 3 months




The Case Shiller year over year price increase showed a modest decline dropping from 12.2% to 12.1%.  (I projected that it would be in the 12.2% to 12.0% range.)   In June 2012 Case Shiller prices increased at an annual rate of 5% in March they reached 23%. They have fallen to 11% in the latest report with June data.  A trend line using the last three months produces a zero price increase in the August data. The year over year gain is illustrated in the chart below in orange.  Anyone using this data to project the future will be in a whole lot of trouble. Monthly data has embarrassing quirks but it is the only reliable approach.  



 It is common to talk about higher mortgage rates causing prices to grow more slowly. The problem is that the impact of higher mortgage rates has yet to hit. The June data is based on April price negotiations.  The following chart indicates that the rate in April was 3.5%.  But the current rate is 4.6%.



  
 The Case Shiller 20 index highlights the surging prices in expensive markets. Media coverage of the hot markets leads to higher price expectations in other markets. The more expensive markets showed a greater response to FHA loan limits, house purchase credit and other programs.  The California market has a long history of booms and busts.  Buyers remember the peak and believe that these prices will return.  With some good news the price stampede will begin.  In the current case, higher FHA loan limits were reinstated, increasing prices beginning in November 2011.  This surge died off in May but then the lower mortgage drove the prices to the peak seen in March.   
Case Shiller is weighted by housing value. The 3 California cities make up 27% of the index and 12% of U.S. housing value.  Despite the headline grabbing California growth, price increases differ sharply by city. Phoenix grew faster than California in January at an annual rate of 27%.  It declined for the fifth straight month to 14%. The four cities that were the most stable during the bubble grew in June by 5%.
The following Chart illustrates the relationship of Case Shiller 20 city and national to housing outside the Case Shiller cities (called Heartland) represents 75% of the housing stock and is drastically lower priced.  Inventories are over 10 months of sales.  Prices outside the Case Shiller grew at only 5 %.    The national inventory is 9 months vs. 3 to4 in California, and 7 months in the Case Shiller. The June national annual price increase is 9% per the FHFA purchase only index.




 Increases in markets such as California are not driven by fundamentals. But price trends are predictable. The decline from the peak of the Bubble in 2006 until federal programs were launched in April 2009 correlated with the price growth in the expansion and personal income at 92%.
Prices can be expected to turn negative and some Case Shiller cities will be particularly hard hit.  Mortgage rates FHA loan limits and other government programs drive activity in expensive market while they have a lesser impact on lower pieced Heartland regions.  The hot markets will resume   declining to a long/ term sustainable price level.