Tuesday, September 22, 2009

The Slow Collapse

As the home buying activity winds down from the typical fervor of the spring and early summer to the doldrums of the fall and then on to the depths of the winter, the course of home prices will play a pivotal role in defining the remainder of our economic decline.

At this point it is safe to say that the consensus opinion now believes that home prices have largely bottomed out… “Yes there may be a bit more down side…”, they say, “but the worst is now behind us”.

Yet, there are a few not so obvious (… especially to the typically oblivious market participants) factors that will work to undermine this confidence in the coming months.

First, let’s consider the effect of the government’s first-time “homebuyer” tax handout as it has clearly spurred on sales activity at the lower end.

Boston is one of the better metro markets to observe the effects of the gimmick as it has both a very stratified market of homes running from the low end “mid-century” capes and ranches to ultra high-end properties as well as a willing pool of indulgent “buyers” who are always eager to take advantage of some government freebie so long as it appears that someone else is picking up the tab.

As you can see, while the low and middle tiers experienced easily the most notable “pop” in prices in at least 22 years, prices for homes on the upper-end continued to decline.

So, “organic” prices… i.e. prices not influenced by the government manipulations of tax credits or FHA lending… are continuing to trend down.

Next, consider that while the traditional media is now very aware of the importance of following the S&P/Case-Shiller (CSI) home price data, they have all but completely missed how the positive effects of both unusually strong seasonality in many modestly hit markets as well as diminished declines in the worst hit have contributed to buffeting the CSI.

The best way to visualize each metro markets real seasonally unadjusted trends is to take advantage of the Radar Logic housing price indices (RPX).

Looking again at Boston compared to Cleveland you can see that while both of these markets typically experience strong seasonal action, this year was exceptional.

Again, this extra-seasonal movement is likely the result of buying at the low-end spurred on by the generous government tax handout but NOTICE that Cleveland is giving us a clear indication of where the trend is heading for the fall and winter… down… and likely down below the low set last winter.

Other markets that will feel the pinch of this seasonal down-draft are: Denver, Columbus, Chicago, Charlotte, Milwaukee, Minneapolis and St. Louis.

Next, note that even the worst hit markets where observers feel most confident that prices have bottomed-out are showing signs that the declining trend may continue.

The following charts display the RPX 28 day aggregates for Phoenix, San Diego, San Francisco, Sacramento, Los Angeles, Tampa and Miami.

Notice that they many appear to have topped out with the coming months possibly bringing the continued down trend.

Finally, consider the plight of New York.

Having yet to truly relent under the pressure of the housing decline it’s important to note that New York missed the spring bounce entirely and now appears poised for some serious downside action.

In short, real “organic” home prices (i.e. prices from sales not influenced by government scams) are continuing to decline, strong seasonal markets that worked to lift the S&P/Case-Shiller throughout the spring and early summer will now worked to weigh it down, the worst hit markets appear to be resuming a declining trend and New York is clearly on the verge of a significant home price slide.

All of these factors will contribute to changing the consensus opinion going forward.


  1. Anonymous4:00 PM

    SATT - just fyi - case shiller puts out a seasonally adjusted series too.

    Unfortunately, it too shows a gain in prices - not as much as the non-seasonally adjusted series, but a gain nonetheless.

    Anyways, you might want to consider graphing that one as it may take some of the "noise" out of your data.

  2. Anonymous8:14 PM

    I heard a report on the radio recently advising that anyone who wanted to take advantage of that whopping $8K (up to) grant should have their contract to buy executed by the end of September.

    So soon this anomaly should be all worked out of the data EXCEPT for any after-shock i.e. the record setting (lowest sales in almost 3 decades, I think I heard) slump in car sales following the cash for clunkers program.

    If the up to $8K R.E. incentive creates the same dynamic the sales stats for November and forward for some period should show a similar crash.


  3. Anonymous8:43 PM

    lets face it, if anyone here thinks Congress is going to let this "stimulus" expire at the end of November, they must be smoking the "green shoots" that are apparently growing so quickly around our feet.

    Congress will extend this into next year (most likely until spring). They have no choice. They see the coming wave of foreclosures from the ARM's resetting, and they need to do anything and everything they can to minimize its effect.

    But, in the meantime, they need for it to appear that it will end. This is what is creating the "panic" to buy.

    Interesting times we are living in...

  4. Anon1,

    The first chart is the seasonally adjusted series but remember seasonal adjustment cannot adjust for the effects of government stimulus (unless of course there are a few years of recurring stimulus) so the seasonal adjustments are not providing the most accurate view ...

    Also, just for the record seasonal adjustment is an important tool but we have to always remember that it is not an exact science... its a hash of the source data to find the trend in a trend using (mostly) the data in the series itself...


    Unfortunately the CSI data reports two months back so the markets will still be looking at peak seasonal results for another few months and like anon3, I expect the feds to extend the program.

    I agree yet I do believe that eventually we will chew through most of the "sidelined" buyers who are silly enough to jump for an $8000 gimmick.

    So the stimulating effects will wear down even if the govt extends the program.

    Another thing to keep in mind too is inventory.

    I have noticed an interesting trend around the Boston area... rising inventory into the fall... this is very unusual and I expect the MAR numbers to start picking it up as early as this months report.

    What I think is happening is that there are MANY sidelined sellers.... as they see what appears to be a market bottom (to stocks, housing and the economy) and what appears to be government stoking buying activity, they are trying to get in on it...

    This may be the makings of a lose-lose situation for the feds... if they effectively spur on home buying activity, inventory will increase putting more pressure on prices.. if the don't stimulate buying activity will slow putting pressure on prices.

    I think this is part of fighting an uphill battle of deflation... its pointless to wage a price war against the "invisible hand".