Friday, December 31, 2010

Many Parts of Country Won't Have Double-Dip In Home Prices Because They Never Had the FIrst Dip

Cato's Alan Reynolds writes in yesterday's IBD:

"A front-page Wall Street Journal feature, titled "Housing Recovery Stalls," worries that "a new bout of declining home prices is threatening to hamper the U.S. recovery." A dip in the Case-Shiller moving average of home prices in 20 cities for August to October is said to be "troublesome headwind" for the economy in 2011, and "markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines."

Some of those cities may indeed account for a significant share of the Case-Shiller index, because that index covers only 20 cities (and Sacramento, the centerpiece of the story, is not one of them). However, a few troubled cities in a few states do not represent the entire nation."

Alan concludes that "anxiety about falling home prices is based on a limited sample of 20 cities," among several other factors. 

Reynolds also refers to a WSJ editorial from yesterday, where Peter Schiff  warns that "...third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable."

MP: The chart above of FHFA house price indexes in eight states (data here) helps to support Alan Reynold's position about falling home prices being heavily concentrated in large cities that are included in the Case-Shiller home price index.  While states like Arizona, Florida, Nevada and California have experienced housing bubbles and huge price declines in recent years, many other states like South Dakota, Iowa, Oklahoma and Texas have seen fairly steady, but very mild increases in home prices, with no bubbles and no house price corrections.  Especially in many states in the middle of the country stretching from Texas all the way up to the Dakotas, it will be hard to have a "double dip" in home prices because they haven't yet had the "first dip."


At 12/31/2010 1:16 PM, Blogger Benjamin Cole said...

This seems to undermine arguments that "Fannie and Freddie did it."
Those agencies have no offices in TX?

At 12/31/2010 1:20 PM, Blogger Buddy R Pacifico said...

Interesting that the Houston area has a a high percentage of homes sold from foreclosure but the value of homes has held up. Any explanation(s) from Houstonites or informed RE folks?

At 12/31/2010 1:25 PM, Blogger morganovich said...


that's a silly argument. Freddy and fannie were the dumping grounds of choice for originators. just because originators in very state did not go after it the same way means nothing.

also note that the states that did not have bubbles are predominantly "sprawl" states that lack dense urban areas.

i don't think your argument holds any water.

At 12/31/2010 1:27 PM, Blogger morganovich said...

meanwhile, the % of loans in foreclosure keeps making new highs.

The average number of days delinquent for loans in foreclosure is a record 499 days
• Over 4.3 million loans are 90 days or more delinquent or in foreclosure
• Delinquency rates are down across all products as more loans entered foreclosure and new delinquencies declined.
• Foreclosure inventory increases are being driven both by elevated levels of foreclosure starts as well as a very limited amount of foreclosure sale activity.

combined with continuing drops in many key markets, this is going to keep a great deal of pressure on banks in the coming year.

At 12/31/2010 2:17 PM, Blogger bix1951 said...

and we are better off if our energy goes into things other than houses.
houses are a liability, they are not productive assets

At 12/31/2010 3:33 PM, Blogger Benjamin Cole said...

I am fine with eliminating Fannie and Freddie and the home mortgage interest tax deduction.

Still, the fact remains, commercial real estate has a mirror collapse to residential, and no Fannie and Freddie.

And some residential areas have not had collapses, despite Fannie and Freddie.

If you read Redleaf/Vigilante's book "Panic" (right-wingers galore) they say collapse was caused by weak underwriting standards to all borrowers, fed by RMBS and CMBS. That is probably the best explanation.

At 12/31/2010 8:25 PM, Blogger NormanB said...

This terrific graph shows a common reaction from a bubble peak: An over-reaction on the downside. For instance, for NV to get to the average for the states shown of +215% house prices there have to go up by 34%; CA's would need to go up 13%. Plus, of course, even with mortgage rates up recently the mortgage payments are even lower than needed for such mean regressions rises.

At 12/31/2010 9:16 PM, Blogger morganovich said...


"If you read Redleaf/Vigilante's book "Panic" (right-wingers galore) they say collapse was caused by weak underwriting standards to all borrowers, fed by RMBS and CMBS. That is probably the best explanation."

i have read it. they totally missed the point, as did most of the folks who have opined on this extremely complex topic. (roubini's book wasn't bad)

the fact is that the CRA forced banks to lend to people they shouldn't. they did so, reluctantly and sold of everyhting they could to freddy and fannie as rapidly as they could. the market got out of control when freddy and fannie dropped their underwriting standards and started buying up liar loans, IO's, and even neg ams.

it was the precise equivalent of a total rube sitting down accross the poker table from you with an infinite wallet. wall st did what any player would do and took the rube for all he was worth. that's poker for you. it's why idiot agencies like the GSE's should NEVER sit down at that table.

absent their near infinite demand for crap loans, the sub prime space would not have exploded the way it did.

if freddy and fannie were so uninvolved, how is it that they wound up needing more bailout money that the rest of the street combined and are still needing more when much of wall street has already paid it back?

At 12/31/2010 9:47 PM, Blogger morganovich said...


however, what i was really objecting to was the logic of your argument. it doesn't make any sense.

imagine the federal government passes a law legalizing stealing car stereos. buy your logic, the resultant increase in theft in manhattan was not caused by the law if theft in peoria didn't go up too.

that is clearly untrue.

the same policy may have different effects (or no effects) in different places. arguing that it must do the same thing everywhere is not a tenable position. a matched dropped in a swamp does noting, but in a wheat field it causes a wildfire.

consider: while the california real estate market blew up, san francisco has barely budged. we are right back at the highs. does that mean there was no crisis in california? of course not. it means something was different about san francisco.

that something was likely the fact that virtually every loan in SF is a super jumbo and not sellable to freddie and fanny. thus, there were no liar loans and all the other junk that california originators did if they knoew they could sell the loans on.

if this were caused by wall st, the size of the loans would not have mattered. wall st would have liked the bigger size. the fact that it did implies that freddie and fannie were a part of the problem. when you take them out of the equation (as in SF) underwriting standards stayed high and you got no crash and almost no foreclosures.

just across the bay in oakland, it was a disaster because the homes were cheap enough to sell the loans to the GSE's.

At 1/01/2011 6:30 AM, Blogger Steve van Emmerik said...

The FHFA data you helpfully link to isn't considered as reliable as Case Shiller (it's not comparing apples with apples on the houses sold) so it's hard to draw conclusions based on 1-2 quarters of FHFA data. Your point that many states/cities didn't have booms is absolutely correct. However the data in the Case Shiller index doesn't support the idea that the price weaknes is just in the ex-price boom areas.

An interesting new trend that is emerging is that the recent movements in house prices do not reflect the previous boom/bust cycle but rather the cities that are at the centre of the political/financial world are holding up while those that are at the periphery are falling.

I blog more on this at

At 1/01/2011 12:30 PM, Blogger Benjamin Cole said...


Okay, then you know office buildings in CA are selling for one-half of peaks. No Freddie or Fannie, CRA )a;; pf which I oppose).

What caused the office building collapse, a mirror of the residential collapse. Supposedly, this was all adults---institutional buyers and lenders.

At 1/02/2011 5:24 PM, Blogger morganovich said...

This comment has been removed by the author.

At 1/03/2011 9:13 PM, Blogger morganovich said...


the commercial real estate market was brought down by the economic and financial collapse caused by the residential one.

people lose jobs, the economy shrinks, credit becomes scarce and lending institutions are all on the ropes.

commercial real estate always suffers in economic downturns and is much more volatile than residential.

what part of that do you find so difficult to understand?

commercial real estate made its high in 2008, 2 years later than residential started to fall.

again, your argument is a total non sequitor.


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