Tuesday, October 27, 2015

Housing inflection point – August closing Update

The Case Shiller 20 city year over year (YoY)for August is one tenth of a percent lower than projected at 5.1%.  August grew at an Annual rate of 1% after 3 months of negative 2 % growth.  It is one month closer to falling off the cliff in October at 4.5% continuing down to 1% by March 2016. This projection is based on annual growth of 2%.  How can this be?  Because, year over year analysis only works well in a stable market. At an inflection point, it is very misleading due to uneven growth, seasonality, and lags in the data.  Under the present conditions, the year over year comparison over states the strength of housing.  However it will understate housing strength in the first quarter of 2016. The Case Shiller data is accurate, the way it is presented is misleading.  

The following chart illustrates the Case Shiller year over year growth and the Case Shiller index both seasonally adjusted and unadjusted.  Seasonal adjustment in house prices varies only slightly year to year.  In May and November the seasonally is one so the seasonal adjusted and unadjusted are equal in those months.  Starting in June the market is more active and prices increase until November. Prices are lower from December to April.  Prices are highest in August, averaging 2.2% above normal and lowest in February, when they are 2.4% below normal.  The House purchases are negotiated 1 to 2 months before th closing.  So December and January negotiations produce the prices seen in February closing data.  The unadjusted prices are lower in winter higher in summer.  The seasonal adjustment removes these swings so trend can be seen in the chart. The test of a seasonal adjustment is the ability to remove noise and this seasonal adjustment works very well.

Prices began growing again in 2012.  Price growth in 2012 and 2013 occurred relatively evenly throughout the year. In 2014 the first quarter GDP was negative.  The first quarter of 2015 was weak but better than 2014.  A house is both shelter and an investment.  Buyers concerned about investment value drive the market in the short run.  If the economy is weak the purchasers will be more conservative about purchase price. 

While August YoY increase is 5.0%, growth from Oct 2014 to March is 5.2%, the other months were weaker or negative.  It would take a major surge in prices to keep the YoY index from falling. In the chart the growth in price is assumed to go from an annual decline of 2% to zero growth in the projection. Comparing the August to August YoY growth marked by “A” to the March to March 2016 growth marked by “M”, Illustrates the impact of uneven growth.

As Yogi Bara might say, “forecasting is hard, especially about the past”.  August closing prices were negotiated in June and July.  Confidence was higher in these months so price growth turned positive.  However, they should not reach the level seen last year. Growth peaked in 2013 declining in 2014 and 2015. Furthermore, growth in the last three years ending in April has been very uneven and the cities that grew so sharply are reaching nose bleed levels.  The California cites grew by 47% and Florida and Nevada cities grew by 40%.  These cites represent one third of the Case Shiller 20 City Index.  New York, Washington, and Boston which represents another third grew by 12%.  I would anticipate that the growth in the next year would range for 2 to 5 percent. The forecasted Case Shiller YoY index through March 2016 is shown in the table below.


Even under a 5% growth the index declines and in this period understates the strength of housing.  Housing is driven by buyer confidence. Such a drop will dent this confidence and cause price declines, particularly in markets that saw high growth.

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