Home Price Dynamics & Paradox

Real Estate

The S&P Case Shiller and the FHFA home price data for September offered a varied message. Where Case Shiller showed month-over-month price decline, FHFA showed modest rise. The reason becomes clear as one understands what markets the two barometers measure. Where the two agreed was in their relative irrelevance, while measuring the month of August at the end of October. That said, we think you will get something out our take on things.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

(Tickers: NYSE: BAC, OTC: FMCC.OB, OTC: FNMA.OB, NYSE: GS, NYSE: MS, NYSE: WFC, NYSE: TD, NYSE: PNC, NYSE: SRS, NYSE: URE, NYSE: IGR, NYSE: XIN, Nasdaq: RYHRX, Nasdaq: TRREX, NYSE: TOL, NYSE: HOV, NYSE: DHI, NYSE: BZH, NYSE: LEN, NYSE: KBH, NYSE: PHM, NYSE: NVR, NYSE: GFA, NYSE: MDC, NYSE: RYL, NYSE: MTH, NYSE: BHS, NYSE: SPF, NYSE: MHO, AMEX: OHB, NYSE: VNQ, Nasdaq: AVTR, NYSE: AIV, NYSE: EQR, NYSE: AVB, NYSE: UDR, NYSE: ESS, NYSE: CPT, NYSE: SNH, NYSE: BRE, NYSE: HME, NYSE: MAA, NYSE: ELS, NYSE: ACC, NYSE: CLP, Nasdaq: AGNC, NYSE: SUI, NYSE: AEC, NYSE: PMT, AMEX: TWO, NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD)

Home Price Dynamics & Paradox

S&P Case Shiller's Home Price Indices reflected year-over-year price increase, but the month-to-month measurement offered a more important guide and told a different story. Case Shiller's 10-City Index showed 2.6% year-to-year increase in metropolitan home prices, and its 20-City Index reflected 1.7% growth. However, the seemingly solid news clouded over more important trends. For instance, 17 of the 20 MSAs measured produced slower rates of annual growth versus those recorded in July. Worse yet, 15 MSAs showed price decline against July. In aggregate, the month-to-month comparisons of the 10-City and 20-City measures showed home prices declining at rates of 0.1% and 0.2%, respectively.

The greater decline in the 20-City Index, and the slower growth in its annual rate of price increase, seem to say the larger MSAs or bigger cities are retaining value better. That is because the largest cities are included in both indices, while the smaller are excluded from the 10-City measure. So if we get variance when removing the smaller cities, as the 10-City Index does, we see what impact the larger and smaller metro areas play in activity. Get it?

My good friend and trader Steve Koufakis, God rest his soul, would warn me that weakness in the euro and European pockets would hurt New York City real estate in the near future. We had heated debates on it, as I would argue for increased Asian demand offsetting the Europeans' empty pockets. It's clear that international demand for big city real estate helps to boost demand for limited preferential locations and helps the average price level as well. Where there is more demand, there will be higher pricing, at least when holding supply constant. In the case of limited territory, you'll get a squeeze on prices. Also, potential international buyers come from a small pool of affluent and wealthy, where economic trough is not felt as significantly. However, we would expect cost constraints on international corporations and other organizations to limit their expansion into US cities of interest, and thus limit demand from relative international sources.

Back to Point: While the month-to-month change stood out, even the yearly comparison is getting sketchy now, with 12 of 20 MSAs reporting negative annual rates of home price change. In other words, the real estate market looks to be entering double-dip territory, which Greek readers should be well-prepared for by now. Prices hit bottom in April of 2009, and so if August prices are not matching up favorably against the prior year period, then we are pretty close to that old watermark.

S&P's Blitzer calls the latest activity a "bouncing around the bottom," but we expect he will eventually be reporting the second dip lower after the fact. Home prices are about where they were in late 2003, but the long-term chart seems to say prices are still above natural levels. We have Alan Greenspan and his low rate policy, along with greed, to blame for this housing price loft.

So, if normalized pricing is somewhere near 2000 levels, which is what the trend line seems to say, then we have a lot lower to go before stabilization. The 20-City composite is down about 28.1% from mid-year 2006 levels, though it's up 6.7% from the April 2009 trough. Given the current credit and unemployment conditions, prices seem to have no driving factor for lift other than demographics, which are pretty significant (Douville makes good points on this). Still, a thumbnail sketch, based on the trend line at S&P's report, seems to say prices could theoretically fall another 33% to the normal historic long-term trend line (2000 levels). However, I think it would take a special catalyst to cause such a shock to the illiquid housing market. This just seems to point toward a stale to sad real estate pricing environment for the medium term, on average. I'm looking for prices to move another 10-20% lower, with the possibility of 33% under extreme conditions. That's a wild number I know, but just look at the charts.

"...it looks to me like the latest life in real estate came on two factors, government stimulus and real estate junkie fix needs."

Basically, it looks to me like the latest life in real estate came on two factors, government stimulus and real estate junkie fix needs. Stock investors, speculators and analysts like me are always looking for the next catalyst for increase or decrease, and so goes the story for real estate investors I think. Thus, once the smallest sign of life and stability showed, they got to buying and drove the latest lift (well the ones with money left anyway).

As reality sets in now, expect it to be depressing. The areas where there was greatest lift should now deflate just as quickly, but keep in mind that there are solid reasons areas like San Francisco, San Diego and Washington were on the quick lift, and those remain. Expect broad-based correction, as the pumped national marketplace benefited from housing catalysts over the last decade.

FHFA reported a different story than S&P, showing month-over-month price increase in August. So what gives then?

FHFA reported a 0.4% monthly price increase in August. July's decline was revised lower though, to 0.7%, from 0.5%. FHFA also reported another difference to S&P's data, with the year-to-year comparison showing a 2.4% decline, where S&P still shows yearly price increases. The difference in opinion must center around the fact that 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. These homes likely have an average value that falls below the value of S&P Case Shiller's aggregate. Thus, these homes have a higher occurrence of foreclosure, affecting the yearly price comparisons.

Also, lower priced homes (at the extreme), perhaps, did not benefit as much from the free capital markets that drove housing. This makes logical sense, since the appeal of the neighborhoods where these homes exist would not generally create special demand on its own. Housing did best along the sunbelt, around the wonders of our world, both natural and manmade; thus near the sea, lakes and golf courses. Prices are higher then on the month-to-month comparison of FHFA lower priced properties, because they must have less room for decrease. Temporary sample issues could be at play as well…

FHFA's data seems to say prices would fall to January 2003 levels to reach the most solid footing. I believe this again suggests that lower priced homes benefited less from the housing bubble.

In conclusion, the reports confirm my longstanding view that housing prices are due to take another step lower, given that step is occurring now. The absence of government stimulus; the struggling labor situation; and given tighter credit conditions, all make the case for it. There should be no surprise, but there should be concern, because as home equity value and perceived wealth are damaged, so are consumer confidence and spending. So as we conclude this analysis of housing prices, we should note that the National Association of Realtors (NAR) just reported more timely pricing information on the large existing home marketplace. That data showed that September prices (vs. August by S&P and FHFA) fell. The NAR reported the national median existing-home price for all housing types was 2.4% lower than the prior year period. Confirmed then, and timely this time!



Editor's Note: Article should interest investors in Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), AMEX: VAZ, AMEX: NKR, AMEX: MZA, AMEX: NXE, AMEX: NFZ, Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.