Putting Housing Prices Into Perspective

I wanted to put some perspective around the housing price correction we are experiencing.

As I have mentioned in the past, existing house prices typically track closely to inflation (measured as CPI-U) over long periods of time. Below is a chart of all S&P/Case-Shiller local market and composite (20- and 10-city) indices through the latest data point (April 2009).



As you can see, in the late 1980's and early 1990's a few local markets, like Los Angeles and Washington DC, experienced a boom relative to other markets. This supports the notion that "real estate is local". Different regional economic characteristics drive local real estate prices. Following the early 1990's recession, all local markets, including those that had outperformed, began to track below CPI.

Looking at the local market peaks (2006-2007) in the most recent housing bubble will give you some perspective of the scale and scope of the price distortions that have occurred and the subsequent price correction. Virtually all local house price indices, with the exception of Rust Belt markets, saw an unprecedented increase in prices starting at the beginning of this decade.

The next chart shows the post-2000 period in greater detail.



Notice the Rust Belt markets of Detroit and Cleveland. Neither appreciated much during the housing bubble. Now, they are certainly declining at faster rates, given the current economic problems in the auto and other manufacturing industries.

Virtually all markets, if they have not already done so, are heading towards CPI-U again. Given the years of languishing house prices we saw in the mid-1990's, I suspect that we will experience that again, and, perhaps, at an even more severe rate given the unprecedented price appreciation and residential real estate construction we saw during this cycle. In my humble opinion, prepare for an "overshoot" on the downside.

The last chart highlights the composites and two Midwest markets.



The 20- and 10-city composites are fast approaching the inflation benchmark. Both the local Minneapolis and the Chicago markets have already fallen below the inflation benchmark. As Spring and Summer 2009 data come in over the course of the next few months, we will likely see seasonal pricing strength, but what happens after Labor Day is anyone's guess.

Furthermore, with the popularity of mortgage equity withdrawal as a means for financing consumption earlier this decade (and putting oneself into further debt), house prices have (oddly) become a critical barometer of economic activity. Financial institutions, investors, and now the taxpayer have a vested interest in seeing house prices stop their decline and begin to appreciate. After all, those mortgage-backed securities have residential real estate as collateral, no?

Another Grim Housing Update

Yesterday's S&P/Case-Shiller house price index indicated a 0.6% and a 0.7% decline in existing house prices for the 20-city composite and the local Minneapolis-St.Paul MSA, respectively, in the month of April 2009 from the prior month. This represents an 18.1% and a 22.1% decline from the year ago period. These price levels have not been seen since April 2003 and August 2000 in the composite and the local markets, respectively.

Below is a chart of the price two indices.



On a real basis (inflation adjusted), existing house prices declined 0.6% for both the composite and the local MSA from the prior month; down 17.6% and 21.6%, respectively, from the year ago period. Real prices at these levels were last observed since April 2001 and September 2007 1997 (corrected) for the composite and the local markets, respectively.

Below is a chart of the inflation-adjusted indices.



From peak pricing, the composite and the local markets are down 36.0% and 40.5% in real terms. We approach a period of seasonal strength in the local housing market.

Below is a chart of real house price changes from peak.



The ratio of the local S&P/CS index to per capita income hit a new low of 80 this month (below last month's low reading of 81), far below the 96 value observed between 1989 and 1999.

Below is a chart.



Nothing new for April. The breathtaking, epic housing correction continues. In upcoming months, we may observe some seasonal house price strength in the local market. However, house prices may continue their general decline as foreclosures continue to rise as government moratoriums expire, demand is sapped by higher unemployment and higher mortgage rates. Housing obsolescence and housing kept off the market due to low pricing power will help reduce inventories.

Podcast of the Week

This week's This American Life is titled "The Watchmen". This installment looks at the financial crisis and the role (lapses) of regulators and the contribution of credit agencies in creating this mess.

(Recall that last year TAL did a fantastic piece (an instant classic!) on the housing bubble entitled "The Giant Pool of Money".)

The piece is worth listening in its entirety, and you can download the episode for free this week.

Regulation--or the lack thereof in the shadow banking system--fueled the housing bubble and, eventually, led to its bursting. TAL argues that part of the problem lies with financial firms "shopping around" for regulators, and the laxest regulator of choice during the go-go bubble years was the Office of Thrift Supervision (OTS). Many financial firms (that failed when the bubble burst and the credit crunch ensued) chartered themselves as a savings and loan, so that they could be supervised by the OTS.

In the second part of the episode, TAL discusses the contribution of credit ratings agencies on this mess and how financial firms shopped around among the three major credit ratings agencies for that sacrosanct triple-A rating.

Good stuff!

Pictures say a thousand words

Florida's "Father Oprah" turns Episcopalian

This story is quite revealing of what has happened to the Catholic Church. Below is the analysis from a traditional Catholic of the sedevacantism mode:

MHFM: Yes, for those who don’t know, “Fr.” Alberto Cutie was a popular and well-known priest in the Novus Ordo. He also appeared sometimes on EWTN. He was recently caught fornicating on a beach with a woman. A great scandal erupted and Cutie was forced to give up the woman or give up the Novus Ordo “priesthood.” Faced with the choice of giving up his illicit relationship and returning to the Novus Ordo or staying with the woman, he came up with a third route. He decided to become part of the Episcopalian sect. This, he thinks, will allow him to be a “priest” and stay with the woman. The whole story is outrageous, yet quite interesting on a number of levels. It’s interesting for what it reveals about the Vatican II Church.

First, this “Fr.” Cutie is an abomination. Not only was he sinning mortally with this woman (and as a heretic in the Novus Ordo), but the woman is (according to reports) already married! It seems like he plans on marrying her, but she’s already married. What does that tell you about the Novus Ordo “priesthood”? Cutie was so thoroughly filled with the “Catholic faith” in his Novus Ordo formation – not – that he not only has no problem becoming Episcopalian (and thus abandoning what he knows of Catholic dogma), but he has no problem accepting divorce and re-marriage. Episcopalians also accept artificial contraception and other moral evils. So, to summarize, in becoming Episcopalian Cutie is: completely denying what he thought of the Papacy; accepting things such as artificial contraception; accepting that Episcopalians have true priests and sacraments (a total rejection of Catholic teaching); accepting the concept of “marriage” to a woman who is already married; etc. This is really something.

What this reveals is that basically all Novus Ordo priests believe in universal salvation. Cutie was a Novus Ordo “priest” – in fact, he was (wrongly) considered one of their few “normal” and “successful” ones. Yet Cutie obviously believes that people who fornicate (e.g., himself), that people who divorce and remarry, that people who belong to non-Catholic sects and religions (Episcopalians), can be saved. He believes that everyone can be saved. That’s the truth.

Moreover, in becoming Episcopalian – and this is quite important to consider – Cutie has simply applied the false theology of the Vatican II sect. For in explaining his decision, he stated (in so many words): “My brothers (in Protestantism) serve God while married, so why can’t I.” He is simply logically applying the teaching of the Vatican II Church. In other words, he is saying that “we (in the Novus Ordo Church) already believe that Protestants are saved, so why should I not become Episcopalian and do what I want?” And there is nothing that any bishop or priest or “pope” in the Vatican II sect can say about it! They can’t say anything about it because their false Church officially teaches that Episcopalians are brothers in the faith and part of the Church and on the road to salvation.

There is not one cleric in the entire Vatican II sect who would or could say that Cutie is on the road to Hell for leaving the Novus Ordo to become Episcopalian. This is so revealing. Cutie not only stands out as an example of an abominable false minister, but as a devastating and convicting symbol of the Vatican II sect’s false theology.

One must also say something about the despicable laypeople. In both the Novus Ordo parishes and in the Episcopalian church, people are clamoring for Cutie. These people have drifted so far from a concern for God’s law. They are so blind in their pride, impurity and vanity – they are so driven in their desire to justify the moral evils of themselves and others – that they are rushing to defend this horrible Cutie. They boldly proclaim that they have no problem with his mortal sins or his apostasy. They have no problem with what he has done and they boldly proclaim that he is justified. One can only imagine what God thinks of these people. God’s disgust at their impiety must be compounded by the fact that these heretics and sinful laypeople actually have the audacity to proclaim as acceptable actions He has specifically revealed are mortally sinful.

Circling the Drain: Local and National House Prices

S&P/Case-Shiller existing house price index was released today for March 2009.

The results are bleak.

For the 20-city composite, existing house prices declined 18.7% on a nominal and inflation-adjusted (real) basis from the year ago period. Prices declined 2.2% on a nominal basis (2.0% real) from the previous month.

In the Minneapolis-St. Paul MSA, existing house prices declined 20.4% and 20.5% on a nominal and a real basis, respectively, compared with the year ago period. Prices declined a whopping (that's a technical term) 6.1% nominal and 5.9% real basis from the prior month.

Below are charts for nominal and real prices.





On a nominal basis, the composite price has not been this low since April 2003 on a nominal basis and May 2001 on a real basis. Local prices have not been this low since August 2000 on a nominal basis and February 1998 on a real basis.

From peak, real prices have declined a whopping 35.6% and 40.3% from peak pricing for the composite and the local markets, respectively. Below is the chart.



There may be some hope that local price declines level off starting in April due to seasonality observed in previous years.

Below is a chart of the ratio of the index to per capita income.



The local market registered a value of 81, far below the average value of 96 observed during the 1989 to 1999 period.

And finally, I wanted to post an updated chart of the crude, 'fit-by-eye' "forecast" I put together last year. With the exception of some seasonality that was not taken into account, actual price declines appear to track relatively well to this forecast.



When do prices bottom? Nobody knows.

House Prices Decline Again

S&P/Case-Shiller was released this morning.

Local (Minneapolis-St. Paul MSA) and 20-city composite existing house price indices declined 20.3% and 18.6% in February 2009 respectively from the year ago period. Local and composite prices declined 3.1% and 2.2% from the prior month.

CPI was relatively flat from the prior month, and real prices declined by the same magnitude on a year-ago and prior-month basis.

Below is the graph of the price index for the 20-city and local markets (nominal, 'unadjusted' prices).


Below is a graph of inflation-adjusted (real) prices. I have included the 1% real growth reference line.



Here's an ugly graph... A graph of the ratio of CS to Per Capita Income.



Local MSA CS-to-per-capita-income index value declines to 86(!) in February. This is far below the 96 average observed from 1989 through 1999. The 20-city composite plummets to 106. There appears to be little 'deceleration' in the rate of decline.

My prediction is that nominal and real prices in the local market will continue their longer-term trends downward, especially given the recent, grim house vacancy figures. In the coming months, prices will likely increase in the local market due to annual seasonal strength in the local market. On the positive side, sales are likely to increase as prices continue to decline and excess inventory is liquidated.

Finally, below is the inflation-adjusted (real) price declines from peak.



On an inflation-adjusted basis, local MSA price declines from peak appear to be picking up at the same rate seen last year.

Nothing to do now but wait for more data and listen to the upcoming Spring selling season spin!

Home Vacancies Rise Again

Bloomberg reports on first quarter home vacancies in the US (prior home vacancy here). Vacancies rose to 19.1 million units in the first quarter; home ownership declined for the third straight quarter to 67.3%.

Let's perform a back-of-the-envelope calculation. There are approximately 300 million people (men, women and children) in the United States. Assume that the average household contains 2.5 people, there are approximately 120 million households in America (300 million divided by 2.5 people per household).

So let's put this in perspective... 19.1 million empty houses in a country with approximately 120 million households.

Too much supply, anyone? How does that bode for prices in the near future?

It's a Smaller World After All

The AP reports today that the global economy shrunk for the first time in 60 years. The IMF estimates that the global economy contracted 1.3% in the past year. More chatter about the worst global recession since the Great Depression.

Amazing that this constitutes for news, since many analysts, who were ignored, have been predicting this for quite a while.