Case Shiller December 2012: Bad but Some Evidence of a Bottom

Written by Steven Hansen

Non-seasonally adjusted Case-Shiller home price index (20 cities) for December 2011 (released today) shows a month-over-month decline of 1.1% and a year-over-year decline of 4.0%. This is the lowest December price index level since 2002.

The market expected a year-over-year decline of 3.6% decline vs the 4.0% actual.

There is some evidence in various home price indices that home prices are beginning to stabilize – the evidence is in this post including the caveats below.

Data through December 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 that all three headline composites ended 2011 at new index lows. The national composite fell by 3.8% during the fourth quarter of 2011 and was down 4.0% versus the fourth quarter of 2010. Both the 10- and 20-City Composites fell by 1.1% in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% respective annual rates both reported for November. With these latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006.

In addition to both Composites, 18 of the 20 MSAs saw monthly declines in December over November. Miami and Phoenix were up 0.2% and 0.8%, respectively. At -12.8% Atlanta continued to post the lowest annual return. Detroit was the only city to post a positive annual return, +0.5% in December versus the same month in 2010. In addition to the three composites, Atlanta, Las Vegas, Seattle and Tampa each saw average home prices hit new lows.

Comparing all the home price indices, it needs to be understood each of the indices uses a unique methodology in compiling their index – and no index is perfect. The National Association of Realtors normally shows exaggerated movements which likely is due to inclusion of higher value homes.

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.

“In terms of prices, the housing market ended 2011 on a very disappointing note,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “With this month’s report we saw all three composite hit new record lows. While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.

“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”

CoreLogic’s Mark Fleming, chief economist commenting on its December 2011 data, suggests distressed sales are continuing to put downward pressure on prices:

“While overall prices declined by almost 5 percent in 2011, non-distressed prices showed only a small decrease. Until distressed sales in the market recede, we will see continued downward pressure on prices.”

Lawrence Yun, NAR chief economist commenting on January 2012 data said strong gains in contract activity in recent months show buyers are responding to very favorable market conditions.

“The uptrend in home sales is in line with all of the underlying fundamentals – pent-up household formation, record-low mortgage interest rates, bargain home prices, sustained job creation and rising rents.”

“The broad inventory condition can be described as moving into a rough balance, not favoring buyers or sellers,” Yun said. “Foreclosure sales are moving swiftly with ready home buyers and investors competing in nearly all markets. A government proposal to turn bank-owned properties into rentals on a large scale does not appear to be needed at this time.”

Lender Processing Services (LPS) in November 2011 saw a decline of 0.8% month-over-month and 2.7% year-to-date.

“Since the post-bubble drop in home prices eased in January of 2009, we’ve generally seen that prices for homes in the lowest 20 percent of local markets in the metropolitan areas covered by the LPS HPI now differ by more than the highest 20 percent from their levels 10 years ago,” said Kyle Lundstedt, managing director of LPS Applied Analytics. “In those metropolitan areas where lowest-priced homes have increased in value, the differences between the high and low ends of the market have usually shrunk; where they have decreased in value, the differences have grown.”

Rather than believing the housing decline is picking up pace, Scott Sambucci from Altos Research is seeing market stabilization in January 2012.

At the end of January 2012, most metro markets saw stable pricing and several are ticking up, as inventory dropped for the beginning of the year. Stable pricing in January, where prices can be expected to seasonally drop, points to a bullish start in the New Year. In parallel with the market of homes for sale, we have observed strength in the rental market. (Altos Research now tracks nearly one million rental units, their pricing and availability each month.) The following chart illustrates the correlation of home prices and rents across the country as of January 27, 2012.

Econintersect publishes knowledgeable views of the housing market.  Also today, Federal Reserve Governor Elizabeth A. Duke spoke on the The Housing Market Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.  Part of her text was noteworthy:

On January 4, 2012, the Federal Reserve released a staff paper titled “The U.S. Housing Market: Current Conditions and Policy Considerations,” which is attached at the end of my written statement. The paper provides information on current conditions in the housing market and analytic background on some housing market issues. Although the paper does not include recommendations for any specific policy actions, it does lay out a framework for discussion by outlining some options and tradeoffs for policymakers to consider. My testimony today will be drawn from this paper.

Six years after aggregate house prices first began to decline, and more than two years after the start of the economic recovery, the housing market remains a significant drag on the U.S. economy. In a typical economic cycle, as the economy turns down households postpone purchases of durable goods such as housing. Once the cycle bottoms out, improving economic prospects and diminishing uncertainty usually help unleash this pent-up demand. This upward demand pressure is often augmented by lower interest rates, to which housing demand is typically quite responsive.

The current economic recovery has not followed this script, in part because the problems in the housing market are a cause of the downturn as well as a consequence of it. The extraordinary fall in national house prices has resulted in $7 trillion in lost home equity, more than half the amount that prevailed in early 2006. This substantial blow to household wealth has significantly weakened household spending and consumer confidence. Another result of the fall in house prices is that around 12 million households are now underwater on their mortgages–that is, they owe more on their mortgages than their homes are worth. Without equity in their homes, many households who have experienced hardships, such as unemployment or unexpected illness, have been unable to resolve mortgage payment problems through refinancing their mortgages or selling their homes.

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 through 4Q2011.

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.

Based on US Federal Housing Finance Agency’s House Price Index (HPI) – home price degradation seems to have paused.

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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