A while back, I noticed a funny thing about the year-over-year rate of change in the Case-Shiller index of San Diego home prices. It seemed that movements in the annual price change rate from positive to negative or from negative to positive provided a good indicator that the long-term price trend had changed direction.
Allow me to demonstrate with some graphs.
The graph below shows the home price index in blue with the year-over-year rate of change for the index in orange. It covers a ten-year period more or less centered around the early-1990s housing bust.
Rich –
With all due respect,
Rich –
With all due respect, and I say this sincerely, I think that the “mission” which your blog served valiantly for a number of years has been rendered “impossible”. Before all this government interference, your blog and several others kept many of us focused on metrics that the mainstream either couldn’t see or chose to either ignore or feebly attempt to refute. This helped many of us avoid the worst of the bubble fallout, which I appreciate greatly.
However, I think most here would agree that this toolbox of metrics has been taken away from us over the past 12-15 months. If we are not able to somehow replace these lost tools with a new set of more comprehensive macro indicators, then we will be stuck watching history unfold behind us. I appreciate frustration over the lag in the Case-Shiller index, and I think your use of adjusted median prices is certainly helpful for buying a couple of extra months of lead time. But does that really matter? – I guess that based on my own bias I believe that a lot of buy decisions hinge more on the 5-10 year outlook, which seems murky at best at this point.
It sure seems hopeless to establish metrics which might have a prayer at quantifying likely outcomes of events spawned by the machinations of government intervention, but what else can we do? I have ranted several times recently about being reduced to making decisions based on “gut feeling”, but this doesn’t make for very convincing arguments or interesting discussion on these matters. If you believe that the printing presses can run unchecked ad infinitum, then all is lost. If not, then it seems that we need to get at the global fundamentals that will ultimately thwart such reckless behavior. I think that some key questions are:
1. How (or better yet “when” 🙂 ) will China’s bubble collapse?
2. What implications will this collapse have for the dollar and the pricing of commodities in dollars?
3. How long can our banks continue to hold their collective breath while “sitting on” inventory they hope to see propped up, especially in light of the potential of 1. and 2.
4. Which way are the political winds headed as we start the 1-year countdown to election 2010 (or will any “change” really matter)?
Oh well – I guess I’ve just ranted again. It’s frustrating to watch all these tools being broken right in front of us. Thanks again for all your hard work. I’ll try to pipe down unless I can offer something useful going forward.
SDnonserfer pretty darn good
SDnonserfer pretty darn good post. I think the biggest “hope” we have is number 1 and 2 on your list. Clearly number 3 is a non starter. The delineation between banks and our government is nil. Basically the govt is a slave to Wall St. Number 4 is in my book, a definitive does not matter who is in office.
Rich I think that is a pretty nice piece of work you put together. I am sure it is hard to keep coming up with new angles to post and I am always interested in the new stuff you put out.
I am not so sure about the exhaustion of the buyers pool theory. I guess we will see but the actual volume of sales is down. However given the lack of inventory my guess is that the ratio of sales to active inventory is up. Similarly it is a great point by SDnonserfer that metrics we use to measure free markets or previously free markets become somewhat unreliable when used in subsidized markets.
Rich, you may have uncovered
Rich, you may have uncovered that most valuable of tools to investors–a reliable leading indicator of price trends. You are too modest in your closing thoughts about how accurate it may prove to be.
Strong uptrends of many months’ duration tend to feed on themselves and be self-reinforcing. Downtrends do the same. This bounceback has legs.
While the previous posters point out some very real headwinds the market could face, the steep slope of both these lines suggest the prices could keep climbing, albeit more slowly, even if it had to take some hits. Borrowing from stock market lore, let’s remember The Trend Is Your Friend, and Don’t Fight The Tape, etc.
EconProf wrote:Rich, you may
[quote=EconProf]Rich, you may have uncovered that most valuable of tools to investors–a reliable leading indicator of price trends. You are too modest in your closing thoughts about how accurate it may prove to be.
Strong uptrends of many months’ duration tend to feed on themselves and be self-reinforcing. Downtrends do the same. This bounceback has legs.
While the previous posters point out some very real headwinds the market could face, the steep slope of both these lines suggest the prices could keep climbing, albeit more slowly, even if it had to take some hits. Borrowing from stock market lore, let’s remember The Trend Is Your Friend, and Don’t Fight The Tape, etc.[/quote]
No offense, but citing self-reinforcement as a force which is likely to prevail over some POSSIBLE head-winds is a claim that requires greater substantiation than quoting stock market lore. There were “trends” during the 1930’s that overwhelmed attempts by the stock market to regain traction. Thus far, Bernanke’s claims that we know better today how to handle financial crises than we did back then APPEAR to be panning out, but this apparent outcome is by no means guaranteed to continue.
You jumped from praising Rich’s quantitative metrics to “trends”. Okay – let’s make the leap to behavioral economics. Show me a behavioral model with enough simulated intelligent agents and interaction links to accurately model the global economy. Let’s agree on some initial conditions. Then start running Monte Carlo cases from now until this crisis has “resolved (definition please?)” – 5,10, 20 years? (using every machine available today for grid computing?). Then we might take another year or two to sift through terabytes of results to determine if the trend was really our friend – OR we can just look around and see what the world looks like at that point.
It’s clear that you and I have different “gut feelings” about this mess. But my point is that that’s what we are currently reduced to – and although it can make for interesting discussion since every single individual has their own “gut”, it is exceedingly difficult to come to “agreement”. It’s like jumping from the comfort of a metric space to a more primitive topological space – you can still talk about “convergence”, but you’ll never have agreement if every individual has their own unique “topology”.
SDnonserfer, the only metrics
SDnonserfer, the only metrics I am relying on right now are indeed the short term metrics. These only go so far though, a couple of months at best and are not to reliable. They are the old standbys, sales to pending and sales to sold ratios, cancelled/expired totals, and just my feel for how I see things on the street so to speak. I think even trying to forecast out 5-10 years is getting tough.
I mean we all agree that high interest rates will hurt the market and potentially hurt it badly. One could look at say, the late 70s and early 80s to see how the rates killed the market back then but even those stats would be unreliable because the mortgages used today are much less consistent. I would say if anything things would be worse today.. .or shall I say worse tomorrow.
The rabbit that the govt will need to pull out of thier hats will be challenging but…. well I guess I will not be surprised if they can put it off for a few years.
I would say that if it is bottom line dollars and cents only, there is no question about buying, do not do it.
I will try to avoid the
I will try to avoid the fawning with my comment.
I did notice in the article your passing mention of inflation in the 1980’s causing a drop in real terms of both home and debt values.
That is really interesting.
It adds yet another reason for me not be afraid of inflation.
High leverage and debt service is a big part of weak broad demand.
If houses become more affordable and mortgages keep their nominal values through an inflationary period, then that could be really good.
Of course if you have money in savings or cd’s then it would suck.
Good for those with negative net worth but bad for those with positive. Yay. I have reinvented the wheel.
Deleveraging the populace through printing.
Dan,
How did you know it was
Dan,
How did you know it was fawning, which would imply bootlicking or something of the sort? By the way,your comments all over this blog are amazing. Thanks for going to the trouble to post them.
I think it’s very dangerous
I think it’s very dangerous to evaluate/compare our current situation to even recent historical situations. The environment is now heavily manipulated and influenced by govt intervention that is unpresented. It may well be that the data is not really the same in many ways as well. This is uncharted waters in many, many ways.
I find it odd, in CA, the
I find it odd, in CA, the epicenter of all the shenanigans, has inventory problems, travel to other states and talk to people about inventory and they have a ton of it, I don’t get it
Peter we haven’t agreed on
Peter we haven’t agreed on alot but I absolutely agree with you on this one. Heavily manipulated is almost an understatement. I was reading one of the blogs…. maybe nakedcapitalism and the subject matter was basically not discouraging government spending. There was a reference to a govt lending program back in the depression that helped people refi into low rate, very long term mortgages. Would not be at all surprised if something like that reincarnated itself.
Rich,
Very interesting but
Rich,
Very interesting but would be good to see data for more housing busts. What about the dead cat bounces in 1992 and 1995 when the annual rate of change almost crossed 0%? Considering the amount of govt intervention involved this time around, you have to discount this year’s annual rate by some margin to have a fair assesment of the long term trend.
Oh well.
We bears will always
Oh well.
We bears will always have CRE.
Here’s a thought, what if the
Here’s a thought, what if the DX keeps headed south because the Federal govt spending and QE? All the while highly leveraged assets like homes continue to waffle in financial limbo? Or decline in price. What if the US$ loses value as most people’s home values also decline?
“What if the US$ loses value
“What if the US$ loses value as most people’s home values also decline?”
That is essentially what happened the last year.
One thing I see a lot of discussion of on this board is the possibility of higher interest rates. Is it possible that since we are all expecting higher interest rates that we will actually see lower rates? If you would have told me in the year 2000 we were going go get a FFR of 1% with Greenspan and then a FFR of 0% with Bernanke I would have said you are insane. Bernanke and company are the poker equivalent of “all in”. I would not put anything past them dollar be damned. Given the massive number of distressed properties, they may need to show us another card soon to stave off a further collapse.
One of charts shows the “Home
One of charts shows the “Home Price Index” increasing by 10% in 2009, yet for that same time period the “Annual Change” rate (year over year) is in negative territory. At first glance this does not make any sense if both the “Home price Index” & the “Annual Change” values are based on Case-Shiller re-sale data from the same time period. The article does not state how the “Home Price Index” is calculated, but if you click on some of the reference links provided you’ll see that Rich has calculated the ‘Home Price Index” in the past using median price per square foot from MLS re-sales data. If the “Home Price Index” (MLS median) is increasing while at the same time the Case-Shiller “Annual Change” rate (year over year) is negative then the only explanation I can think of for this discrepancy is a change in the sales mix (the ratio of expensive homes sold to inexpensive home sold is increasing) , as opposed to an actual increase in home values.
If you examine the points on the historical graphs where the “Home Price Index” is increasing over a period of more than a few months you will see that the Case-Shiller “Annual Rate” of change was always a positive number. The clear exception to this is the recent “Home Price Index” increase in 2009.
To me the graph indicates that current uptick in median price per square foot is being be caused by a change in the sales mix as opposed to a “head fake” recovery or long term recovery in home values. Of course the graph does not necessarily reflect the reality of the current situation.
george wrote:One of charts
[quote=george]One of charts shows the “Home Price Index” increasing by 10% in 2009, yet for that same time period the “Annual Change” rate (year over year) is in negative territory. At first glance this does not make any sense [/quote]
Why not? Home prices are higher than their April bottom, but still lower than a year ago — how does that not make sense?
rich
Rich Toscano wrote:george
[quote=Rich Toscano][quote=george]One of charts shows the “Home Price Index” increasing by 10% in 2009, yet for that same time period the “Annual Change” rate (year over year) is in negative territory. At first glance this does not make any sense [/quote]
Why not? Home prices are higher than their April bottom, but still lower than a year ago — how does that not make sense?
rich[/quote]
I knew a porn star named April Bottom.
MMMM….
I think she was into sharks.
Rich,
Your right, it does
Rich,
Your right, it does make sense. I have my time periods out of sync. 10% increase since April, not 10% for the last year.
George, your comments on
George, your comments on possibly the mix changing reminds me of a prediction made last spring by Mr. Mortgage or Dr. Housing Bubble (I forget which). They said that up to that point the mid/high end market has been moribund; hardly anything selling, and that eventually some of those Alt-A recasts and foreclosures would be distressing themselves onto the market. Even though the seller would (probably) be taking a loss on the house, since it comes into the pool at a higher selling price that would push the *vanilla* median up.
Same commentor also stated that if said house was purchased in 2000 for $200,000, saw a market peak value of $700,000, and now sells again for $500,000, in the Case-Schiller calculations it also looks like an increase but masks the fact that its market valuation has fallen since the peak.
Of course median *price per square foot* is a different animal which is why Rich sensibly tracks it. In fact I think the mix-change should not change the median ppsf so much.
CricketOnTheHearth
[quote=CricketOnTheHearth]
Same commentor also stated that if said house was purchased in 2000 for $200,000, saw a market peak value of $700,000, and now sells again for $500,000, in the Case-Schiller calculations it also looks like an increase but masks the fact that its market valuation has fallen since the peak.
[/quote]
I am hearing this an awful lot and I don’t quite understand what the issue is. In the case of your example, the house sold for $200k, then for $500k — so it went up. Those two data points figure into the calculation that helps to show that between 2000 and now, home prices went up (which they did). It says nothing about the peak, because this house was not sold at the peak. However, other houses were sold at the peak, and those sales were used to calculate the index value at the peak. (EG, perhaps your example house’s neighbor sold for $200k in 2000, and then unlike this one DID sell for $700k at the peak). So the CS index would show a certain rise between 2000 and 2005, and a smaller rise between 2000 and now, and thus a fall from the peak. So the CS index is doing exactly what it should be doing… so as I said I don’t understand what this criticism is all about. Am I misunderstanding it?
rich
BTW Cricket, you are right
BTW Cricket, you are right that the main reason to use the median ppsf is to mitigate the effects of compositional changes. But in this case that’s not much of an issue anyway — in the above graphs, I am using just the final 2 months’ worth of changes to the median ppsf. So in order to suffer from a distortion that would make a big difference, there would have to be a very significant compositional shift within just a 2 month period — very unlikely.
Rich
Rich,
Can we get some price
Rich,
Can we get some price to income and price to rent ratio historical plots for comparison with the 1990 bubble/bust as well. Maybe also good to have interest rates in the 1990s as well.
http://piggington.com/shambli
http://piggington.com/shambling_towards_though_more_recently_from_affordability
Rich
Rich Toscano
[quote=Rich Toscano][quote=CricketOnTheHearth]
Same commentor also stated that if said house was purchased in 2000 for $200,000, saw a market peak value of $700,000, and now sells again for $500,000, in the Case-Schiller calculations it also looks like an increase but masks the fact that its market valuation has fallen since the peak.
[/quote]
I am hearing this an awful lot and I don’t quite understand what the issue is. In the case of your example, the house sold for $200k, then for $500k — so it went up. Those two data points figure into the calculation that helps to show that between 2000 and now, home prices went up (which they did). It says nothing about the peak, because this house was not sold at the peak. However, other houses were sold at the peak, and those sales were used to calculate the index value at the peak. (EG, perhaps your example house’s neighbor sold for $200k in 2000, and then unlike this one DID sell for $700k at the peak). So the CS index would show a certain rise between 2000 and 2005, and a smaller rise between 2000 and now, and thus a fall from the peak. So the CS index is doing exactly what it should be doing… so as I said I don’t understand what this criticism is all about. Am I misunderstanding it?
rich[/quote]
Th criticism is based on the fact that the CS numbers aren’t telling people what they want to hear. More and more long time posters are buying and their free time is spent painting as opposed to posting. The CS index has always had minor flaws, you’ve modified it and produced current estimates and ppsf versions to take some of the flaws out of it but to it’s credit it has not changed the way it calculates it’s numbers, nor have you. It has never been completely off the mark, it has never lied, it’s based on verifiable numbers and it has compared apples to apples. Trying to dismiss something because you don’t like what it has to say is a bit of a trap, using Mr. Mortgage as gospel to dismiss case shiller as fiction is a recipie for disaster.
Th criticism is based on the
Th criticism is based on the fact that the CS numbers aren’t telling people what they want to hear. More and more long time posters are buying and their free time is spent painting as opposed to posting. The CS index has always had minor flaws, you’ve modified it and produced current estimates and ppsf versions to take some of the flaws out of it but to it’s credit it has not changed the way it calculates it’s numbers, nor have you. It has never been completely off the mark, it has never lied, it’s based on verifiable numbers and it has compared apples to apples. Trying to dismiss something because you don’t like what it has to say is a bit of a trap, using Mr. Mortgage as gospel to dismiss case shiller as fiction is a recipie for disaster.[/quote]
Keep on painting if that suits you – no harm there – I sure wouldn’t mind being in that situation myself. However, many of us have given up on housing market indicators as useful metrics for either side of the argument. Housing is now just one piece (albeit a large one) of a free market economy that is in “repression” (ie. being totally distorted (repressed) by policy makers under the thumbs of big-money interests). Many of us simply cannot bet that our sources of income here in SD will still be reliable 5-10 years (or perhaps even 3 years) into the future. So the 5-7 years of ownership “rule” (if it still has any meaning at all) isn’t our most immediate concern.
We need to acknowledge that the whole game is in jeopardy – so broader understanding is a must. We’re nitpicking trends in housing metrics while Rome is in flames.
SDnonSerfer wrote:Th
[quote=SDnonSerfer]Th criticism is based on the fact that the CS numbers aren’t telling people what they want to hear. More and more long time posters are buying and their free time is spent painting as opposed to posting. The CS index has always had minor flaws, you’ve modified it and produced current estimates and ppsf versions to take some of the flaws out of it but to it’s credit it has not changed the way it calculates it’s numbers, nor have you. It has never been completely off the mark, it has never lied, it’s based on verifiable numbers and it has compared apples to apples. Trying to dismiss something because you don’t like what it has to say is a bit of a trap, using Mr. Mortgage as gospel to dismiss case shiller as fiction is a recipie for disaster.[/quote]
Keep on painting if that suits you – no harm there – I sure wouldn’t mind being in that situation myself. However, many of us have given up on housing market indicators as useful metrics for either side of the argument. Housing is now just one piece (albeit a large one) of a free market economy that is in “repression” (ie. being totally distorted (repressed) by policy makers under the thumbs of big-money interests). Many of us simply cannot bet that our sources of income here in SD will still be reliable 5-10 years (or perhaps even 3 years) into the future. So the 5-7 years of ownership “rule” (if it still has any meaning at all) isn’t our most immediate concern.
We need to acknowledge that the whole game is in jeopardy – so broader understanding is a must. We’re nitpicking trends in housing metrics while Rome is in flames.[/quote]
Rich:
Please use April Bottom
Rich:
Please use April Bottom in a sentence.
Please.
Sorry for the botched
Sorry for the botched post(s). It’s late and I failed to preview them.
Good point regarding flaws in
Good point regarding flaws in the case-shiller and median price metrics. Reminds me of the arguments here in 2006, when prices were flat-to-slightly down early in the year. People here were arguing about how median price, C-S and other indicators were not accurately measuring the market since there were other signs of weakness.
Once the negative numbers starting piling in, declining at a rate of 10-20% per year there were fewer arguments. I believe this was due to the magnitude of the changes not the sign. When the signal is that large, minor flaws in the metric don’t really matter.
Now that the rates are flat or up modestly some are questioning the metrics and pointing out the same flaws (or inventing new flaws).
Regardless of these obvious flaws, the case-shiller and median prices are useful indicators of the market in the long run. Get over it.
Yes, FSD, what’s funny is
Yes, FSD, what’s funny is that the whole reason I have taken so much time to become versed in the dry details of the CS index, is that in 2006 or so all the bulls were trying to make the fantastical argument that home prices actually weren’t falling, and that CS (which showed they were falling) was flawed. I spent a lot of time rebutting those arguments.
Now, a lot of bears are arguing that CS is flawed and is understating the price decline. And while there are some issues with it, they are minor and a lot of the so-called flaws they cite are actually not flaws at all — just like with the permabulls in 06.
SDnonSerfer, I have to say, I pretty much am in complete agreement with your point that the market is heavily manipulated and that the economic/fundamental relationships of old don’t have the same influence they once did. Where I disagree is with your implication (as far as I can tell) that we should just stop looking at the data. The economic relationships may be suppressed right now, but the data is all we have in trying to figure out what’s going on. The best we can do is to look at all data and try to put the pieces together.
rich
I wouldn’t propose playing
I wouldn’t propose playing ostrich at this point. I’m just very frustrated that these useful tools have (in my mind) lost their potential for prediction – they’re perhaps telling us what HAS happened (in the past 6-12 months) but by themselves don’t make a strong argument for what to expect over the next five years.
My wildest wish would be to accurately understand the global political-economic forces that are now driving all this. These might allow some predictive power. However, these are hugely complex and perhaps even too dynamic to pin down as political actors react quickly and often unpredictably to perceived threats to their power.
If this blog continues it’s primary focus on local and regional data, then perhaps there is a need for some other missing data:
1. I’ve wondered out loud a few times now about where the money is coming from for the purchases of the last 6-12 months. Is there a reasonable way to find out without too much trouble?
2. If the money is really coming from owner-occupiers, what does this pool of buyers look like – is it dwindling – now that the 1st round of tax credit buying is just about over. I know you present jobs data as well as home sale and foreclosure data. I’m beginning to feel that the jobs data may have an edge in terms of predictive power if we can only view it from the right perspective.
Anyway, please don’t misunderstand my criticism. I am a big fan and continue to appreciate the data which you are able to provide – I’m just very frustrated by all the government attempts to sustain what is very likely unsustainable. This economy is far from having corrected itself for 1-2 decades (or more?) of financial imprudence.