Wednesday, April 22, 2009

Did The Housing Market Bottom in Late 2008?

WASHINGTON, DCU.S. home prices rose 0.7% on a seasonally-adjusted basis from January to February, according to the Federal Housing Finance Agency’s monthly House Price Index. January’s previously reported 1.7% increase was revised to a 1.0% increase. For the 12 months ending in February, U.S. prices fell 6.5%. The U.S. index is 9.5% below its April 2007 peak.

The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine Census Divisions, seasonally-adjusted monthly price changes from January to February ranged from –1.2% in the East North Central Division to +3.8% in the Pacific Division.

MP: The chart above shows that the OFHEO Home Price Index increased in each of the last two months, following a 20-month period of 18 monthly decreases. The two consecutive month increase in home prices in January and February 2009 was the first time in almost two years that the index increased two months in a row (since March and April 2007). The chart also suggests that housing prices may have bottomed out at the end of 2008, and we might now be in a period of sustained price increases and a housing market correction.


At 4/22/2009 10:27 AM, Blogger misterjosh said...

What's their methodology? The difference could be just a different kind of house in the mix, not actual house value difference. I like the Case-Shiller index, because they index based on the sales price of the same exact house at different points in time.

At 4/22/2009 1:06 PM, Anonymous Eric Tyson said...

Good graph...Josh, I've written about the problems with Shiller's data and the strengths of OFHEO data and will be posting more later today on this topic.

A Scary Looking Housing Graph
Is Housing No Longer a Good Investment?

At 4/22/2009 3:34 PM, Blogger Bill said...

Josh: Shiller only uses, I believe, date from the top 20 cities whereas OFHEO is nationwide. Thus, OFHEO is arguably the more comprehensive and accurate index.

At 4/22/2009 3:35 PM, Blogger Bill said...

I see now that Eric makes some of the same points also. The bottom line is Shiller's index may project an overly negative view at present.

At 4/22/2009 4:06 PM, Blogger misterjosh said...

Thanks for the clarification. I was afraid that it was one of those indexes that simply reported the average sales price of all homes sold in a given period.

I think Case-Shiller index has its uses, but I agree that referring to it as a national index is deceptive.

Due to a work relocation I now own homes in Mesa, AZ and Minneapolis, MN so I keep an eye on the numbers for those markets for personal reasons.

At 4/22/2009 4:26 PM, Blogger Mark A. Sadowski said...

The principal advantage of the OFHEO index is that it has broader geographical coverage than Case-Shiller index. The Case-Shiller national index (to be distinguished from the 10 city and 20 city aggregate indices) does not include data on 13 states and includes incomplete data on 29 others.

However the OFHEO index is flawed in a number of ways that make it notably inferior to the Case-Shiller index. Two of the problems with the OFHEO index are related to the fact that its numbers are based only on homes sales with conforming home mortgages (prime loans less than $417,000), which eliminates a large percentage of real estate transactions, whereas Case-Shiller looks at all home sales, including nonconforming loans. First, OFHEO excludes all homes with mortgage loans of over $417,000 and so completely misses the top end of the housing market. Second, the OFHEO uses home price appraisals rather than actual sales prices. Third, the OFHEO uses an inferior method for weighting homes that have lengthy intervals between valuations. Fourth, since the OFHEO excludes subprime loans, it misses the huge differences in price patterns for inexpensive homes with alternative financing.

So despite the fact that the OFHEO is more geographically comprehensive than Case-Shiller, it excludes the very portions of the housing market that have experienced the most speculation and the the highest probabilty of distressed loans, and, it is clearly subject to methodological flaws. Thus it is far less accurate and far less representative of the overall housing market. The Zillow index, the third major index of housing prices, is an indicator of just how inferior the OFHEO index is. The Zillow index correlates very well with Case-Shiller with a Pearson correlation coefficient of 95%. However both Zillow and Case-Shiller correlate with OFHEO rather poorly with Pearson Correlation coefficients of only about 50%.

I suspect that as housing prices continue to in most parts of the country over the next couple of years, fewer and fewer people will be referring to the OFHEO index as it increasingly diverges from reality.

At 4/22/2009 7:57 PM, Blogger Jack McHugh said...

Very possibly a dead cat bounce. The index I find most revealing is the ratio of sale prices to rental rates. Fortune wrote it up here:

That index underlines the extent to which housing is consumption, and is inextricably linked to real incomes. If housing prices are a function of this equation -- percentage of income dedicated to housing/income -- then prices will fall further as the denominator in that equation falls.

At 4/22/2009 9:42 PM, Blogger Bill said...

This comment has been removed by the author.

At 4/22/2009 9:45 PM, Blogger Bill said...

According to this article the index is calculated as follows: "The index is calculated using purchase prices of houses financed with mortgages that have been sold to or guaranteed by mortgage finance sources Fannie Mae or Freddie Mac".

So, this index is broad based and is based on actual sales data, is showing price increases but it does not cover homes with non-Fannie/Freddie loans. This looks like confirmation that housing prices have indeed stabilized and are now rising again in my opinion.


Post a Comment

<< Home