October 2011 Case-Shiller Shows 3.4% YoY Decline

Non-seasonally adjusted Case-Shiller home price index (20 cities) for October 2011 (released today) shows a year to date decline of 0.3% and a year-over-year decline of 3.4%.   Based on revised numbers for September 2011, the year-to-date decline was 0.2%, and the year-over-year decline was 3.5%.

The market expected a year-over-year decline of 3.0% decline (10 cities – actual was -3.0%).

All the leading home price indices declined in October.  Econintersect will compare all of them in this post, but first the Case-Shiller headlines:

Data through October 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed decreases of 1.1% and 1.2% for the 10- and 20-City Composites in October vs. September.  Nineteen of the 20 cities covered by the indices also saw home prices decrease over the month. The 10- and 20-City Composites posted annual returns of -3.0% and -3.4% versus October 2010, respectively.  Fourteen of the 20 MSAs and both Composites saw improved annual returns compared to September’s data.  Miami saw no change in annual returns in October; while Atlanta, Detroit, Las Vegas, Los Angeles and Minneapolis saw their annual rates worsen. At -11.7% Atlanta posted the lowest annual return.  Detroit and Washington DC were the only two cities to post positive annual returns of +2.5% and +1.3%, respectively.

Comparing all the home price indices, it needs to be understood each of the indices use a different methodology in compiling their indexes – and no index is perfect.  The National Association of Realtors normally shows exaggerated movements which likely is due to inclusion of higher value homes.  However, the seasonal downturn began with their August data.

Econintersect is seeing a gentle upward trend in the volumes of sales.   This trend is indicating improving dynamics in existing home sales.

A synopsis of Authors of the Leading Indices:

Case Shiller’s David M. Blitzer, Chairman of the Index Committee at S&P Indices sees some general weakness in the data.

“There was weakness in the monthly statistics, as 19 of the cities posted price declines in October over September.  Eleven of the cities and both composites fell by 1.0% or more during the month. And even though some of the annual rates are improving, 18 cities and both Composites are still negative. Nationally, home prices are still below where they were a year ago. The 10-City Composite is down 3.0% and the 20-City is down 3.4% compared to October 2010.

“In the October data, the only good news is some improvement in the annual rates of change in home prices, with 14 of 20 cities and both Composites seeing their annual rates of change improve. The crisis low for the 10-City Composite was back in April 2009; whereas it was a more recent March 2011 for the 20-City Composite. The 10-City Composite is about 2.4% above its relative low, and the 20-City Composite is about 1.9%.

“Atlanta and the Midwest are regions that really stand out in terms of recent relative weakness. Atlanta was down 5.0% over the month, after having fallen by 5.9% in September. It also has the weakest annual return, down 11.7%. Chicago, Cleveland Detroit and Minneapolis all posted monthly declines of 1.0% or more in October. These markets were some of the strongest during the spring/summer buying season.  However, Detroit is the healthiest when viewed on an annual basis. It is up 2.5% versus October 2010.  Atlanta, Cleveland, Detroit and Las Vegas are four markets where average prices are below their January 2000 levels; and Atlanta and Las Vegas posted new lows in October.

CoreLogic’s Mark Fleming, chief economist commenting on its October 2011 data, suggests there is a supply – demand mismatch:

“Home prices continue to decline in response to the weak demand for housing.  While many housing statistics are basically moving sideways, prices continue to correct for a supply and demand imbalance.  Looking forward, our forecasts indicate flat growth through 2013.”

Lawrence Yun, NAR chief economist commenting on November 2011 data said home sales should be improving – but are not – blaming it on several factors.

“Sales reached the highest mark in 10 months and are 34 percent above the cyclical low point in mid-2010 – a genuine sustained sales recovery appears to be developing,” he said. “We’ve seen healthy gains in contract activity, so it looks like more people are realizing the great opportunity that exists in today’s market for buyers with long-term plans.”

“A higher rate of contract failures has held back a sales recovery. Contract failures reported by NAR members jumped to 33 percent in October from 18 percent in September, and were only 8 percent a year ago, so we should be seeing stronger sales.”

“Other recent factors include disruption in the National Flood Insurance Program, and lower loan limits for conventional mortgages, which paradoxically force some of the most creditworthy consumers to pay unnecessarily higher interest rates.”

Econintersect publishes knowledgeable views of the housing market. The common thread remains that no one is seeing any hard evidence that the general decline in existing home prices is over.

Caveats on the Use of Home Price Indices

The housing price decline seen since 2005 varies by zip code. Every area of the country has differing characteristics. Since January 2006, the housing declines in Charlotte and Denver are well less than 10%, while Las Vegas home prices have declined almost 60%.

Each home price index uses a different methodology – and this creates slightly different answers. However, all are in concert saying that home prices are continuing to decline.

The most broadly based index is the US Federal Housing Finance Agency’s House Price Index (HPI) – a quarterly broad measure of the movement of single-family house prices. This index is a weighted, repeat-sales index on the same properties in 363 metro centers, compared to the 20 cities Case-Shiller.   However, this index is updated only through 3Q2011.

The red line is the HPI index divided by the Consumer Price Index (CPI-U). This division approximates chained dollar look at home prices.  Home prices remain 20% above their pre-bubble price levels. In other words, home prices need to fall another 20% to get into the price range enjoyed in the 1980′s – before the effects of the Baby Boomer/credit expansion home price bubble.

Recent review of the Fed 2011 stress tests for banks has a new recession scenario that would see home prices decline another 20% from here. It is unlikely that the attempts to complete a bottom here could hold under those conditions.

Econintersect analysis of recession indicators is still not seeing the start of new U.S. recession, however. We can only hope that outlook continues.

One area that has been absent from discussion of home prices recently is the affordability factor. After hearing about how affordable home purchasing had become earlier in the year, the optimism on that front has waned. At the beginning of the year an article at CNN/Money by Nin-Hai Tseng quoted Moody’s Mark Zandi as part of what she wrote:

After declining during the depths of the latest recession, prices for rentals nationwide increased modestly by about 3% in 2010, partly driven by a record number of homeowners looking for new digs after foreclosing on their homes. In Moody’s latest list of rent ratios (which is the price of a typical home divided by the annual cost of renting that home) for 54 U.S. metropolitan areas, 39 fell into the ‘better to rent’ category — roughly the same level it’s been for the past year.

But that may finally be about to change. Moody’s chief economist Mark Zandi expects the trend to reverse this year in many major cities. This would be a positive development, as a healthy housing market typically puts renting and owning at more equal footing.

“By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country,” Zandi says.

A few factors will be at play. For one, home prices are expected to fall further, with some economists expecting a 15% to 30% drop this year. This might be bad news for household finances and current homeowners fearing that their most prized asset stands to lose more in value. On the flip side, this makes homes more affordable and might finally spur more home sales, especially at a time when the rate of home construction has been the lowest since before the Second World War.

It turns out that home prices have declined of the order of 3% in 2011, not up to 30% suggested just eleven months ago. It is still much more beneficial on a cost basis to rent (national average C-S Comp 20) than to buy, as shown in the graph from Calculated Risk.

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