Tuesday, October 28, 2014

Fourth consecutive monthly decline in Case Shiller


David Blitzer, Chairman of S&P index committee, stated that “The deceleration in home prices continues.” True. But would it have been more useful to point out that if the decline of the last 4 months continues, the year over year index will be 4.0% next month and negative with the reporting of December activity.  The year over year price growth of 5.6% for the Case Shiller 20 city consists of 8 positive months which grew at 6.9% and the last 4 negative months which is why the index will turn negative so quickly. 
   .
These trends are illustrated in the following graph:
Source: Case Shiller

After the end of the house purchase credit in June of 2010 prices were negative. The market reacted to restoration of lower FHA loan limits in November 2011 and rebounded, peaking in May 2012.  Prices declined in June but the euphoria about price increases lead investors and buyers to pile in, creating the peak in March and April of 2013. Prices declined with the last strong month in March of 2014.
 
The two year “housing recovery" was a reaction to government action to stimulate the housing market and intensive lobbying to keep these subsidies.  Income and job creation were weaker in 2012 than when prices took off. The stimulation actions were successful in the short run but they are not permanent. They are most effective in high priced markets which have far to fall.

The following Table illustrates the decline by city.  To aid understanding these cities are combined into groups of cites that are similar but definitely not the same. The cities are with two exceptions grouped by the increase in price from the start of the bubble in June 1997 to the peak in June 2006.




Price Declines are much greater than would be seen in the year over year comparison because this analysis masks what is happening in the market. Prices in California are down With a 27 Percentage point drop in San Francisco.  Los Angeles prices were lower than typical for California because higher house prices had already made this city less competitive so price growth dropped only 9 points.  The resort markets, which were growing rapidly dropped to zero. Washington, New York and Boston price increases fell at double digit rates.  The most rapid decline was in mid-priced mid- western cities.  The stable cities declined but at half the 20 city 14 point decline.

Monday, October 27, 2014

Turlia’s Misunderstanding of Housing Seasonality



 Turlia Chief Economist Jed Kolko states in his article, “Lets Improve not ignore Seasonal Adjustment of Housing data,”  that the current seasonal adjustment of housing prices is inaccurate because the seasonal adjustment takes years to reflect the foreclosure sales which are lower priced and spread more evenly throughout the year.  He goes on to say “Unfortunately, many have concluded that the solution to the problem is to downplay or ignore seasonally adjusted housing data.” He has solved the problem with his Weighted Average Adjustment Factor (WSAF) which uses the 2004 Seasonal adjustment and adds the most extreme seasonal factor for each month and averages the result. You might expect that a prominent housing economist knows what he is taking about, but each statement about seasonality is wrong.

So is the seasonal adjustment inaccurate?  The following chart illustrates that the seasonal adjustment increases the winter lows and the summer highs since the beginning of 2011. The trends are clear; the problem of inaccurate seasonal adjustments he proposes to fix does not exist.

The  X11 Seasonal program used by the census bureau, Standard and Poor,  and just about everyone except Kolko, removes the impact of higher foreclosure sales, lower first time buyer participation, lower expectations for prices gains, etc.  In short all sorts of changes in the market. Yes there is a lag, but it is a two or at most a three year lag.  Kolko’s belief that 8 years after the bubble burst, the seasonality has not adapted to the changed market is absurd.

Kolko points out that Standard & Poor’s, the publisher of Case Shiller states that “The unadjusted index is a more reliable indicator.” He naively assumes that they are they saying that because they believe it. They want to focus on the year over year data and avoid embarrassing questions about monthly changes. They formerly preferred to use seasonal data until they faced too many questions about changes in monthly results that they switched to year over year comparison.

I forecasted revenue in a business where the seasonal swings were three times greater than house prices. I did adjust the seasonal factors but only for differences in workdays which X11 does take into account. For example, if Christmas was mid-week then more time would be taken off and December would be weak. Many frustrated analysts blame seasonality or their blown predictions. It is a comforting delusion, a brilliant analyst who is a victim of bad seasonal factors. 

 Last month I stated that July data declined by half a percent which was a 6% annual decline in my blog: housingcycles@blogspot.com. No, I was told, Kolko’s seasonal adjustment was half a percent higher so prices were flat. But Kolko’s prior month seasonal was also higher so the annual decline was slightly higher with his numbers. While Kolko makes error after error in developing his seasonal factors and they are more erratic and less reliable they are not all that different than the current ones he wants to save the world from.  His seasonal adjusted numbers show a decline in the last two months.  I will stick with X11 which shows a decline in the last three months.