Written by Steven Hansen
Non-seasonally adjusted Case-Shiller home price index (20 cities) for February 2012 (released today) shows a year-over-year decline of 3.5% (versus 3.9% in January). This is the lowest February price index level since 2002.
The market expected a year-over-year decline of 3.4%.
There is some evidence in various home price indices that home prices are beginning to stabilize – the evidence is also in this post, including the caveats below. Please see the weekly post Economic Headwinds from Real Estate Moderate.
Data through February 2012, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed annual declines of 3.6% and 3.5% for the 10- and 20-City Composites, respectively. This is an improvement over the annual rates posted for the month of January, -4.1% and -3.9%, respectively. In addition to the two Composites, 15 of the 20 MSAs posted better annual returns in February compared to January; Atlanta, Chicago, Cleveland and Detroit fared worse in February and Washington DC’s rate remained unchanged. Nine MSAs and both Composites posted new cycle lows as of February 2012. Atlanta had the only double-digit negative annual at -17.3%. This was the fifth consecutive month of double-digit negative returns for Atlanta and the lowest annual return in its 20-year history. Five of the 20 MSAs saw positive annual returns – Denver, Detroit, Miami, Minneapolis and Phoenix. Phoenix, which is one of the cities that fared the worst during the crisis, has now posted two consecutive months of positive annual returns and five consecutive positive monthly returns. However, it is still down 54.2% from its peak.
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.
“While there might be pieces of good news in this report, such as some improvement in many annual rates of return, February 2012 data confirm that, broadly-speaking, home prices continued to decline in the early months of the year. “Nine MSAs — Atlanta, Charlotte, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa — and both Composites hit new post-crisis lows. Atlanta continued its downward spiral, posting its lowest annual rate of decline in the 20-year history of the index at -17.3%. The 10-City Composite declined 3.6% and the 20-City was down 3.5% compared to February 2011.
“Due to delays in reporting for Mecklenburg County, we did not publish a January index level for Charlotte, North Carolina last month. With this month’s report we have enough data to publish data points for both January and February. The unfortunate news is that it confirms that Charlotte is one of the cities that is still reaching new lows.
“Phoenix and Atlanta stand out this month in terms of their contrasting relative strength and weakness in the early 2012 housing market. At one end of the spectrum, we have Atlanta posting a double-digit, and lowest on record, annual rate at -17.3%. Atlanta has now recorded five consecutive months of double-digit negative annual rates and seven consecutive monthly declines. On the other hand, Phoenix has posted two consecutive months of positive annual rates, with its latest being +3.3%, and five consecutive positive monthly returns.”
CoreLogic’s Mark Fleming, chief economist commenting on its February data, suggests distressed sales are continuing to put downward pressure on prices:
“House prices, based on data through February, continue to decline, but at a decreasing rate. The deceleration in the pace of decline is a first step toward ultimately growing again. Excluding distressed sales, we already see modest price appreciation month over month in January and February.”
The continued strength of sales activity and tightening inventories in many markets are early and hopeful signs that prices will continue to stabilize and improve in the coming months. In fact, non-distressed home sale prices, which represent two-thirds of all sales, have appreciated by just over 1.0 percent since the beginning of the year,” said Anand Nallathambi, president and CEO of CoreLogic.
Lawrence Yun, NAR chief economist commenting on March 2012 data said the market is improving unevenly – but there is light at the end of the tunnel.
“We were expecting a seasonal increase in home listings, but a lack of inventory has suddenly become an issue in several markets with not enough homes for sale in relation to buyer interest,” Yun said. “Home sales could be held back because of supply factors and not by demand – we’re already seeing this in the Western states and in South Florida.”
NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said buyer traffic is up. “Our members are reporting an increase in foot traffic from a year ago, but more importantly, home shoppers this year are much more serious about finding the right home and making an offer,” he said. “Stabilizing home prices and historically favorable affordability conditions are giving buyers more confidence, and Realtors® have become more optimistic since the beginning of the year from the positive shift in buyer patterns.”
Lender Processing Services (LPS) in December 2011 saw a decline of 1.0% month-over-month, and expects a 1.2% decline in January 2012.
“Following the real estate bubble, the proportion of short-sale transactions is much higher than historically observed. Other HPI suppliers have not updated their analyses in the face of increased short-sale transactions. Identifying and correctly accounting for short-sale price discounts produces an HPI that better represents non-distressed sales,”
Econintersect publishes knowledgeable views of the housing market.
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.