Wednesday, May 28, 2014

Case Shiller growth is way above trend

Economists predicted that the Case Shiller 20 city index would grow by 0.7% this month. Instead it grew by 1.2%.  The forecasts were an indication of the price trend, but the Case Shiller cites vary substantially by month.  The following chart tracks the last 12 months of monthly prices changes adjusted to an annual rate. The 1.2% rate is equivalent to 16% annual growth. In the last 12 months the Case Shiller has shown substantial variation, but the trend line shows a decline of half a percent per month.    

Forty percent of the difference from forecast is attributable to Detroit, which appears to be on its way out of bankruptcy.  Prices grew at a rate of 3.7% - an annual rate of 55%.  Another problem is that closings come in over three months. The prices of closings that come in the first month will differ from average of the first and second months and change again in month three.  This difference can be substantial. The seasonal adjustments are small but they also are a source of error.

This is not a new issue. Months like this lead Case Shiller to promote year over year price comparison to make the data appear more creditable. However this data is misleading. The recent year over year numbers have been more influenced by large swings in 2013 than those in 2014.  This month the index rose 1.2% from 0.8%. But the Case Shiller year over year index went down because March of 2013 was so much higher. It is very misleading. 

Prices should grow at a lower rate in the coming months. The price growths of more expensive markets such as the 3 cities in California which make up 27% of the index are falling.  Los Angeles was 358% of the start of the expansion while Dallas was 135%.  Dallas affordable housing has helped growth while Los Angeles growth is poor. Price growth in Los Angeles is declining because prices are unsustainable. Los Angeles prices are twice the inflation adjusted level that they were in 1997. Prices for the Case Shiller index are 150% of 1997. The Case Shiller trend is 10% which is twice the rate for the nation.  Most of that national growth is in the Case Shiller cities. The Case Shiller gives the appearance that prices are stronger than they are. A drop in these cities could cause national indexes which get little attention to turn negative and get attention causing house buyers to postpone purchases.

For example, in cities like Columbus, Ohio, which did not grow rapidly in the housing bubble, prices grew 3.6% in the first quarter, an annual rate of 15%. Yet prices adjusted for inflation are 80% of the price at the start of the bubble in 1997.  Prices have room to grow but purchasers could be impacted by reports of a national price decline.

Thursday, May 1, 2014

House Price Risk masked in current data

House price trends - misleading stability
David Blitzer of S&P said “Prices remained steady from January to February for the two Composite indices”.   True, but it ignores the negative underlining trend. The Case Shiller 20 city index is 12.9% above February of last year.  Next month will be 11.7 % because of the explosive growth in March 2013. Even if the next monthly index fell by a third, it would only lower the year over year number by two tenths of a point. What is the value of knowing what happened in March of last year? That is what the 12 month number is measuring in the current environment.  The year over year measurement is a backward looking view that does not account that is for the rapid decline in the price index shown in the chart below:

The California cities (Los Angeles, San Diego and San Francisco) represent 27% of the 20 city index, so a sharp change will have an outsized impact on the total index. Prices in the latest month grew at an annualized rate of 9.5%- down 0.6% from the prior month.  However, 10 months ago prices were growing at 24% annually up from 3% growth in January 2012.  In November, the cities outside California came very close to the California results. The 17 city prices grew at 13% in November but declined to 7% in February.  

The sharp decline in the 17 cities is masked by the pop up of prices in California. The standard deviation of monthly price data is high and it soars in expensive cities.  This month the rate of price increase in San Francisco and San Diego dropped sharply while in Los Angeles it doubled.   The variation in the 17 cities was much less. However the four resort cities, Miami, Phoenix, Tampa and Los Vegas all experienced low price growth after months of high growth. New York and Washington and Cleveland had lower growth while Chicago and Seattle were higher.  In part this is because the first month is only one of three months of data but mostly it is because local markets are volatile.  This housing data has to be looked at as a trend of several months or similar cities batched together.  In January the index for that month was 10.6%. It was restated to 10.1% and the next month came it at 9.5% -a  !.1% decline.

The Case Shiller data is very reliable if used with care. Publishing a 12 month average with volatile data is a great way to avoid embarrassing questions about data credibility by creating a false impression of stability. However this sets up the forecaster for nasty surprises.   The likelihood that the California cities will resume their decline is high and if that happens the Case Shiller index will take an unexpected drop.