Analysis of the Housing Recovery Mirage

by Keith Jurow, Capital Preservation Real Estate Report

At the end of March, it was announced that the 20-city Case-Shiller Index was up 8.1% year-over-year. Nearly all housing experts declared that this was further confirmation that the housing recovery was firmly in place.

A few weeks earlier, Zillow had released its latest survey of 118 economists, strategists and other experts on the expected direction of home prices over the next five years. Every one expected higher prices with the most pessimistic prediction showing an average annual increase of 3%.

Clearly, there is a very broad consensus that the housing market has bottomed. In the article below, I review much of their analysis. For those of you who have never read any article of mine, I have been consistently asserting that there is no convincing data to support the view that housing markets have turned the corner.

Because my view is so out-of-sync with the consensus, it is worth taking an in-depth look at what my latest research has uncovered.

My conclusion is that the much-vaunted housing recovery is actually a mirage and that a new delinquency crisis is coming.

Home Prices in the Northeast

We’ll get to the Case-Shiller Index shortly. Let me begin by showing you raw sale price numbers from the largest family-owned brokerage firm in the northeast – William Raveis & Co. This table shows the average price-per-square-foot for single-family homes in five northeast states. The figures are for the months November 2012 through January 2013.

The figures show the average price-per-square foot (ppsf) for all single-family homes sold in these towns and cities. As far as I know, Raveis & Co. is the only brokerage firm in the country which provides these statistics. Their website also provides median sale prices. I wiIl explain why I prefer the use of average price-per-square-foot.

Here is why. A median price is simply the point at which half of the prices of homes sold are above it and half are below it. It is greatly influenced by the mix of homes sold. Sharp reductions in the sale of foreclosed properties will great affect the median price.

I’ve emphasized repeatedly in previous articles that the banks have severely curtailed the number of foreclosed properties (REOs) which they have put on the active MLS market. For example, in the spring of 2009, 2/3 of all homes sold in the Greater Phoenix area were foreclosed properties. In December 2012, a mere 10% of the homes sold were foreclosures.

Since foreclosed properties are normally the lowest-priced homes on the market, the sharp reduction in sales of these inexpensive homes will almost always raise the median price of sold homes. Yet a higher median price does not necessarily indicate that homes prices would be rising without this market manipulation by banks.

The average ppsf is not skewed by the plunge in foreclosed property sales nearly as much as the median sale price. But since foreclosed homes will normally have the lowest ppsf in any market, the average ppsf will also tend to be pushed up by the scarcity of foreclosures for sale. Thus it is all the more remarkable that prices in my home state of Connecticut showed double-digit declines in average ppsf for numerous towns.

Now you may object to the use of average ppsf. I have found that the ppsf does not vary all that much throughout a given town for comparable homes and does not change much month-to-month. Three bedroom homes tend to command a slightly higher ppsf than four bedroom houses. Nonetheless, I believe that average ppsf is a far more reliable indicator of home prices in a town than the median sale price.

Home prices in Connecticut have been much weaker than in the other four northeast states. Some of you will object that the figures from show that prices are up in other New England cities and towns. Granted. But you can see that, with one glaring exception, year-over-year price increases in the towns I’ve listed have been tepid at best.

Cambridge, Massachusetts is the one bright spot. Remember that it is the home of both Harvard and MIT. As a college town, it has greater job stability than most other communities. So it is not at all representative of even the rest of Massachusetts.

If you think I may be cherry-picking towns, go to and see for yourself. Just hit the drop-down menu called “Housing Data” and link to “View Local Housing Data.” You can view nearly every city or town in five states plus Westchester County in New York State.

My Concerns About The Case-Shiller Home Price Index

Okay, I can hear you say: What about the Case-Shiller 20-city Index, which has been showing increasing strength for many months?

That’s a very fair objection. Let’s examine the Case-Shiller Index – the gold-standard for home price indices. It clearly has more credibility than any other home price index in the nation. Standard & Poors – the publisher — has actually put out a lengthy explanation of the methodology behind the Index which I have read more than once.

The Index uses what they call a “repeat sales” model because it takes recent home sales and matches them with a previous sale of the same property. You need to realize that certain important assumptions underlie the Index. By far, the most important is that very different weighting is assigned to matched pairs of home sales depending on certain questionable criteria.

A paired sale is assigned a weight which could be anywhere from zero to one depending on how far the pair differs from the “average price change for the entire market.” The purpose of this is to smooth out distortions which the creators believe are caused by extreme price changes that differ markedly from most of the other price changes in a given metro area.

The most dubious weighting factor is that a home which has a longer time interval between its two paired sales is given considerably less weight than one where the interval is much shorter. For example, a home in which the interval between sales is 15 years may be assigned a weight of only 70% of that of a paired sale with a nine-month interval. S & P explains that the weight could be as low as 55% of the paired sale with a 6-month interval.

Why does the Index weight home sales so differently? S & P explains the assumption behind the time interval weighting this way: “over longer time intervals, the price changes for individual homes are more likely caused by non-market factors” (i.e., physical changes in the property such as adding a bedroom).

I am convinced that this weighting of sales is a real flaw in the accuracy of the Index. In its 2012 Profile of Home Buyers and Sellers, the National Association of Realtors reported that the median length of time that home sellers had owned their house was 9 years. This means that nearly every home sold in 2011-2012 was given a much lower weighting than the few homes which were resold within two years or less.

Why is this so important? The different weighting given to paired sales causes the index figure to be very far removed from the raw sales data. You may think that this weighting is justified. I prefer sales data to be as close to the raw sales price as possible to avoid distortions. As I see it, the weighting used to create the Case-Shiller Index distorts the price changes in the major housing markets in the Index. If its methodology were used on the numbers for New England, their sale prices would look completely different.

The Looming Crisis of Seriously Delinquent Mortgages

Throughout the country, banks have severely reduced their foreclosure activity. If you doubt this, take a look at these statistics.

Click on table for larger and sharper image.

The effect of this severe reduction in foreclosing activity by mortgage servicers is to artificially increase the median price of homes sold in just about every major metro.

I have reported in several previous articles that delinquent homeowners are continuing to walk away from their underwater properties. Nowhere is this done with more worry-free abandon than in the NYC metro. Take a look at these shocking new statistics that I have obtained from the NY State Division of Banking. They show the cumulative totals for pre-foreclosure notices sent to delinquent owner-occupants in New York City and Long Island.

Click on table for larger and sharper image.

Let me carefully explain these statistics. They show pre-foreclosure notices which mortgage servicers have been required under a NY statute to send to all delinquent borrowers in owner-occupied properties. The law did not compel the servicers to send notices to delinquent owners of investment properties. One of the nation’s most reputable foreclosure attorney has assured me that there are no duplicates in these numbers because servicers were not required to send a follow-up notice.

I have solid figures from the Federal Reserve Bank of New York on the number of first mortgages in both NYC and Long Island. So the latest figures from the NYS Division of Banking indicate that roughly 30% of all owner-occupied properties in NYC are now seriously delinquent. For Long Island, it is an incredible 35%.

These percentages may be difficult for some of you to believe. I completely understand. It took me a while to wrap my arms around them. You may ask me this: How do you know that nearly all of these delinquent properties are still delinquent? Don’t many either become current in their payment or are eventually foreclosed?

Those are fair questions. Had the banks been foreclosing in the NYC metro, then the total number still delinquent would certainly be much lower than the Division of Banking figures. But the banks are not foreclosing in the NYC metro. I have shown this in several previous articles.

Take a look at reliable figures from The borough of Queens has 2.2 million residents. On April 1, 2013, there were a total of 91 foreclosed and repossessed properties actively listed for sale. That’s right – 91. With more than 101,000 delinquent owner-occupants having been sent a pre-foreclosure notice since early 2010, only 91 repossessed properties are on the market.

What happened to all the delinquent property owners? Nothing. Take a good look at this chart from the Long Island Real Estate Report.

The chart shows monthly foreclosure filings on Long Island. The monthly average is less than 1,000. Remember, more than 240,000 pre-foreclosure notices have been sent to delinquent owner-occupants in the past three years.

Do you see the red line on the top of each bar in the chart which began to appear in late 2009? Those are refilings. What’s that? Once a filing (called a notice of default) has been active for three years, it expires under NY state law. So the attorney for the lender has to refile the notice and begin the process all over. Picture those owners living in their house for more than three years without having paid a nickel toward the mortgage. It’s crazy, but that is what is occurring throughout Long Island.

The Plunge in Homes Listed for Sale

Much of the media has focused its attention on the sharp decline in homes for sale over the last year. They claim that this is another sign that the housing market is improving.

Take a look at these terrific statistics on inventory for sale in 21 major metros by the online brokerage firm, Redfin.

Year-over-Year Change in Active Property Listings

You can see that total home listings are down largely because of the huge drop in both repossessed properties and short sale homes on the market. In these 21 major metros, the number of foreclosed properties for sale dropped nearly in half in the past year.

Take a look at another graph showing the plunge of homes for sale in two cities in Orange County, California.

As I’ve explained, the plunge in sales of foreclosed homes artificially pushes up the median price in a metro area. But it does not necessarily indicate a strengthening of any particular market.

Listings of non-distressed properties are up slightly on average in the 21 metros in the Redfin study. This is puzzling. You would think that more homeowners would be listing their properties now as the market strengthens. I believe there are two important reasons why home sellers have not jumped back into the market.

First, non-distressed listings have increased the least in those metros which suffered the largest price decline after the bubble collapsed. In an important study which came out last June, data provider CoreLogic pointed out that listings are down the most in those metros with the highest percentage of mortgaged properties which are underwater.

CoreLogic’s perspective confirms what I’ve been saying for two years. Homeowners who owe more than the property is worth now are very reluctant to sell. They are even more unwilling to pursue a short sale and face the possibility of having to pay back the deficiency from the shortfall.

What Should You Do Now?

Whether or not you realize it, I suggest that most of you have an important decision to make in the next year or two. If you are a potential buyer, you need to determine whether to buy or wait. If you are committed to selling your home, you must decide whether to put it on the market now or wait until the height of the selling season in May or June. If you’ve had your property on the market without success, you have to determine whether or not to pull your home off the market.

There is one more crucial group. If you are a homeowner not sure whether to sell but worried that home prices in your area could go lower, you need to decide whether to put the home on the market this selling season.

What are people around the country doing? In January 2013, Redfin published the results of its second home seller survey. Questioning potential sellers in 20 metros around the country, it found that 81% of them believed that prices would rise in the next 12 months. A mere 3% thought prices would decline. One of the biggest concerns of potential sellers was that prices would rise after they sell. Because of this, 21% of those considering selling had decided to wait and rent out their home instead.

The authors of the Redfin survey stated one conclusion without hesitation. One main cause of the shrinking inventory of homes for sale is this view of most homeowners that they would be better off waiting at least a year before putting their house on the market.

As I see it, homeowners have been greatly influenced by those in the media who have been asserting that the bottom has been reached and prices are clearly heading higher.

For three years, I have been offering readers what I believe to be compelling evidence that housing markets have not yet reached a bottom. May I suggest that you take a good look at some of the 30+ articles of mine that BUSINESS INSIDER has published so you can review this evidence. You can find them at

Going against a widely-shared consensus is never easy. Keep in mind, though, that experts have been declaring a housing bottom for more than three years. If you are a homeowner considering whether or not to sell, consider the possibility that my analysis is correct. Once your house becomes underwater, you may feel trapped and unwilling to sell.

Learn more about Keith’s new Capital Preservation Real Estate Report which covers all aspects of real estate markets.

This article was also posted at Business Insider.

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One reply on “Analysis of the Housing Recovery Mirage”

  1. One additional ingredient to your fine analysis is that LLPs & LLCs  are being formed to buy and securitize tens of thousands of distressed homes and not put them up for sale but to rent them out- Often to the current resident who heretofore paid nothing for their accommodations. If you take a look at your statistics the distressed homes are disappearing from the market and your data supports that event. 
    We are fast becoming a nation of not home owners, rather home renters.

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