Saturday, January 01, 2011

House Price Indexes: Case-Shiller vs. FHFA; Based on FHFA, There's No Threat to Economic Recovery

In a post yesterday, I discussed Alan Reynolds' recent editorial in the IBD titled "Do Falling Home Prices Imperil Recovery?, where he points out that house price declines in a "few troubled cities in a few states [based on the Case-Shiller 20-city composite house price index] do not represent the entire nation."  This was in response to a recent front-page Wall Street Journal article ("Housing Recovery Stalls") that fretted about how "A new bout of declining home prices (based on the October decline in the Case-Shiller house price index) is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing." 

Like the chart in the previous post, the chart above provides further evidence of the significant disconnect between the Case-Shiller Home Price Index (10-city composite above for Boston, Chicago, Denver, Las Vegas, LA, Miami, NYC, San Diego, San Francisco, and Washington D.C.) and the FHFA U.S. House Price Index.  As Alan Reynolds pointed out, the FHFA U.S. House Price Index based on 50 states increased by 1.07% in the third quarter of this year vs. the previous quarter, the largest quarterly gain since the 1.30% increase in the fourth quarter of 2006.  Based on the FHFA House Price Index, there's no threat to the U.S. economic recovery.  


At 1/01/2011 11:55 AM, Blogger BBL Jr said...

Seems to me all of these cities are blue state cities. I don't see Dallas, Houston, San Antonio, Austin, Kansas City, Omaha, Des Moines, St Louis and many other cities included. The list seems designed by the inbred media centers to avoid "flyover" country.

At 1/01/2011 12:01 PM, Blogger BBL Jr said...

I just read this post (Many Parts of Country Won't Have Double-Dip In Home Prices Because They Never Had the FIrst Dip) from earlier and realize you already made the point I was trying to make in the previous comment.

At 1/01/2011 12:28 PM, Blogger Realist Theorist said...

FHFA's HPI is not necessarily better than Case-Schiller as an indicator of what is happening in the housing.

Firstly, CS's national index may seem like it covers a few cities, but it actually covers the extended metro areas around these cities.

Secondly, these areas account for a large amount of the nation's homes. So, it is not terribly important that Wyoming is not covered, because there is not that much real0estate and purchasing power there. While a broader index would be better that what we have now, it is important to point out that CS's national index covers 70% of the nations homes (by value). So, it is fairly broad, even if it could be broader.

Thirdly, FHFA's index covers conforming loans so it would not reflect an important part of the sub-prime boom. The FHFA leaves out too many moderately-priced homes (and they clearly say they do so).

Finally, FHFA uses appraisals to some extent, whereas Case-Schiller is very objective in using the price on the same property.

None of this is a critique of FHFA. It is fine to do what they do when estimating and making indexes.

However, it is false to suggest that the FHFA is somehow better than Case=Schiller's broader national index.

At 1/01/2011 12:31 PM, Blogger Benjamin Cole said...

What caused the nationwide collapse of commercial property values?

At 1/01/2011 12:55 PM, Blogger rjs said...

by city, for the case-shiller 20

At 1/01/2011 2:04 PM, Blogger Ron H. said...

Thanks for the great chart, Prof. Perry. The title indicates that you have information on future house prices in 2011:Q3. As this information isn't likely available anywhere else, I predict that this will become an extremely popular blog.

At 1/02/2011 7:27 AM, Blogger Rich B said...

Clearly, the CS index, being based on a smaller data set, is more volatile. The CS index rose more rapidly and is dropping back to a level similar to that of the broader index.

At 1/02/2011 3:01 PM, Blogger morganovich said...

"Based on the FHFA House Price Index, there's no threat to the U.S. economic recovery. "

there is absolutely no way you can make that claim from that chart, even if it is trending up and even if we accept the poor methodology they use.

imagine that 52% of houses are tending up and 48% down. sure, you might get an aggregate 1% increase out of that, but it tells you nothing about an impending crisis.

when a house goes up in value, the equity belongs to the homeowner. when it drops in value, the negative equity winds up threatening the bank. so, even if 70% of houses are going up in value, if 30% are dropping like a rock, that is more than enough to wipe out the banks, which as i'm sure you recall, was the big issue earlier on in this crisis.

the aggregate number only matters if the costs and benefits accrue to the same person.

whether or not you are correct about the real estate market, you simply cannot make the claim that you did based on this chart. there isn't anything like enough information in it to say anything meaningful about an impending crisis.

At 1/03/2011 4:23 AM, Blogger JGBellHimself said...

Mark, you have struck out even worse that Casey at the Bat @ Economix-NYT.

Please, take note of THIS fact - Case-Shiller account for ALL sales, in the 20 largest market in U.S. But, FHFA does not.

FHFA make NO jumbo or above RE loans, and have effectively stopped making any condo loans. Their "market" is ONLY the one they loan to - below their lending limits.

Therefore, they do NOT represent any local, nor any "national" market. Sorry, you got that one flat out wrong.

Even more inexcusable is your "shadow REO" analysis.

What the foreclosure lenders/banks now KNOW is how many new listings they can dump into the RE markets, by each local market, and both sell them AND not further depress their sales prices. This is NOT a "normal" market, and it sure as Hades is NOT a "free" one.

What THAT means is that they control the bottom of the RE market. While they CAN control the bottom, they can NOT control the top. Nor anything above jumbo loan limits, or condo prices.

So, they DO control the floor. And, they will not permit it to fall any further. That does NOT mean there will be any upturn until they are through "dumping". Nor does it mean that RE markets outside their control will not continue to fall, drastically.

In truth, you do not even see what you think you see.


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