NY Fed: Has Housing Bottomed? A Definite Maybe

Econintersect:  A study was just released today by Federal Reserve Bank of New York (NY Fed) that has the provocative title:  “Just Released:  Housing Checkup – Has the Market Finally Bottomed?”  The key to their conclusion is the graph below.

This shows that the median county in the U.S. just passed the line defining positive year-over-year price change.  This is not the first time that has happened since the end of The Great Recession, but the previous excursion into this territory was produced by federal tax incentives that were offered temporarily over two years ago.

The authors of the report offer some cautionary comments right up front:

Over the past few months, some national housing market indicators have begun to look a bit brighter. As of May, the CoreLogic national home price index had risen three months in a row. While still at a relatively low level, housing starts now have a clear upward trend. These developments have led some analysts to declare that, after five years of generally declining prices and activity, the housing market has finally bottomed out. While the national statistics are encouraging, whether or not the housing market has bottomed out is actually a much more difficult question to address for a couple of reasons. First, the United States is not a single housing market but rather a collection of numerous local housing markets. Second, the health of a local housing market is determined by a variety of indicators in addition to prices.

In addition to tracking price history the author’s also tracked sales volumes.  They normalized these to sales in 2000-02 to avoid bias from the housing bubble.  They found that sales volumes are dramatically below those of the earlier period.  At the 75 percentile point in the data sales were approximately 70% of the volume in the reference period, which included all of the 2001 recession.  The 50 percentile data point had sales about 60% lower now and for the tenth percentile sales were 90% lower.

Note how widely scattered the red counties are around the country.  Likewise for the darker greens.  The saying that real estate has three important variables (location, location, location) is emphasized by the map.  You can be in metro New York or some areas in southwestern New England and be orange; you can be nearby in the New York Capital region, including Saratoga, Glens Falls, Lake George  and it’s all green.  A similar contrast between adjacent areas is seen in northern California, Florida and northern Indiana into southern Michigan.

The paper observes that distressed sales appear to have peaked in 2011 and they have an interpretation:

It appears that across the distribution, the distressed-sale share peaked in mid-2011 and has started to decline. Distressed sales may be akin to a patient having a fever—a defensive reaction that, while painful, speeds recovery—as unsustainable mortgages are withdrawn from the market. And the data may be indicating that the fever is beginning to break.

The conclusion does not make a very bold statement:

If these trends continue, then local housing markets are making progress in their convalescence. However, our analysis indicates that most local housing markets still have a way to go to achieve a clean bill of health.

Among the things that are not addressed in the study is the sudden decline in foreclosures entering the market over the past several months.  This has been a matter of concern to others who have looked at the data.  Some say the decline in foreclosure sales is not a sign of a decline in the foreclosure problem, but a slowdown in bank pursuit of forecloses.  In the video below real estate expert Keith Jurow discusses how small a fraction of delinquencies are actually entering foreclosure processing in the metro New York area.  He also points out that in some markets that he follows prices per square foot for houses has dropped over the last year far more than median or average prices.  He says that systems which track price only may be missing the severity of continuing valuation losses in some markets.

The video below is a presentation by Keith Jurow to the Financial Policy Council (New York) in June 2012.  Note: There is over four minutes of introduction before Keith starts his presentation.

John Lounsbury

Source:

• Just Released:  Housing Checkup – Has the Market Finally Bottomed Out? (Joshua Abel, Richard Peach, and Joseph Tracy, Federal Reserve Bank of New York, 17 July 2012)

• Searching in the Shadow Inventory For A Solution to the Foreclosure Crisis (Adam Geller, Huffington Post, 31 March 2012)