Tuesday, August 26, 2008

Case Shiller for June Released

I speculate we're season a seasonal effect in the reported Case-Shiller numbers. The rates of decreases are dropping with a few cities flat (+/- .25%/month) and we're even seeing Boston, Denver, Atlanta, and Minneapolis having healthy price increases! All of the cities that broke a Case-Shiller of 200 are still declining.

















Most of the cities that broke 200 will continue to drop. The best months of the year have yet to be reported on and it looks like DC will go flat for August with a small chance of it going positive.










Notice that the large drops started last year in September and reached their peak in January/February. It wouldn't be that surprising to see a seasonality in the rate of losses.



One thing that annoys me about predictors is when they won't admit the data isn't supporting an earlier predictions. One should of course update predictions based on new data. While I've been avoiding making predictions for this time of year, I must admit that the strength of what I believe to be the seasonality is doing much better than my expectations. So we need to look at the data going forward to see if:

1. This is a seasonal slowdown in the pain or...

2. Home prices have dropped enough to regain "stickyness"

I believe that the securitization rate of mortgages points to #1, but one must always consider all of the alternatives. Even alternatives that didn't seem to make sense six months ago.

My prediction remains that we'll enter the 18 months of the greatest home price drops starting this Fall (late Fall?). If I sum it up, about 1/3rd of the cities are still dropping quickly. About 1/3rd of the cities are near flat (within +/- .25%/month), and a third of the cities are seeing good appreciation. Yes, the cities dropping are dropping far faster than those appreciating.

Further note on Seasonality: Traditionally August and June are the two strongest selling months of the year. So if this is not seasonality, we would expect July to be stronger than June. If July is weaker than June its still possible to have August the strongest sales (by prices) of the year.

But then there is that pesky credit crisis. ;)

Got Popcorn?
Neil

5 comments:

The Anonymous said...

"One thing that annoys me about predictors is when they won't admit the data isn't supporting an earlier predictions. One should of course update predictions based on new data. While I've been avoiding making predictions for this time of year, I must admit that the strength of what I believe to be the seasonality is doing much better than my expectations. So we need to look at the data going forward to see if:

1. This is a seasonal slowdown in the pain or...

2. Home prices have dropped enough to regain "stickyness""

Great post Neil. Ive been hoping for months you would do this "if (a) then we'll see... but if (b) well see..." sort of analysis and now you have.

1. SEASONALITY... I am really on the fence with the "seasonality" issue. Other bloggers I respect have commented on it, and said it was true, plus the case shiller futures market suggests its real - plus I think I have seen it in some past year data, so there very well could be somethig to it.

That said, it still just doesnt make sense to me. I mean we are talking SAME HOUSE SALES here - how can there be so much variation in the SAME HOUSE depending on the month in which it is sold? (Again this isnt yelling directed at you, its just emphasis as I am thinking out loud.)

Now if this is true, the logical conclusion is as a buyer looking for the best deal you should ONLY be shopping during certain months of the year. Something to think about...

So in sum on seasonality, the evidence tells me yes, but my gut tells me no - so call this one a wash for me...


2. STICKYNESS. I lean more toward this solution but not necessarily just because of stickyness. I lean towards it for the following reasons...

(a) Its consistent with the Case Shiller futures market which suggest that the big price drops are now til this winter, and then moderate drops (with seasonal dead cat bounces) for the next few years.

(b) Its consistent with your inflation line on the graph and takes out some (but not all) of the undershoot you are suggesting.

(c) Its consistent with a model that suggests this is a foreclosure driven market. Stickiness is irrelevant in foreclosures as the bank tears it away from the homeowner and sells it at whatever the market will bear - period. When the foreclosures diminish (maybe next spring) the rate of drop has to moderate as the emotional homeowners are now driving the market and dont want to "give their house away".

Note (a) (b) and (c) above are predicated on steadily tighter credit, a bank failure or two, and a continuing moderate job loss. In my view, all these things are baked in. Now if something major happens such as (x) the disappearance of fannie or freddie, (y) a terrorist or other attack that undermines peoples confidence or (z) big convusions in the job market, all bets are off...

wannabuy said...


how can there be so much variation in the SAME HOUSE depending on the month in which it is sold?


The book "Real Estate cycles" goes into this. It can be a 5% difference (in a normal year) on the sales price due to the month. During certain months there is almost always a surplus of buyers. In other months, only discounting will attract the few buyers out there. This time inventory is persistent.

It could be stickyness. I'm not predicting that. But for completeness, I must acknowledge its a possibility and see if that data starts to support that.

You make good points. I would point out that here in California, the rate of foreclosures being handed to the banks is still higher than the rate of banks selling foreclosures. While DC could see a balancing out of foreclosures to foreclosure sales in 2009, most of the bubble markets will not. Not to mention Alt-A foreclosures start up in earnest next spring.

Oh... California foreclosures are so far behind schedule that 1st notice is often 7 to 9 months *after* the 1st missed payment. Yikes! (The backlog is that huge.)

I think tight credit markets will *really* matter in 2009. We'll see...

But like I said, to do a good prediction, I have to look into the probability of scenarios I would, at first, think as unlikely. But one thing I'm good at is finding out how those unlikely scenarios can happen.

Then again, one of my first 'big discoveries' at work was a jet engine failure mode that everyone considered very unlikely. I showed why it was a danger to the fleet, the actual physics behind the failure (which were far different than the initial assumptions) and thus why new designs ready to enter the fleet had to be redesigned as they pushed the dangerous physics. :)

BTW, too many of the press are reporting 'record drops in Case-Shiller.' Ugh... that's a record 1H drop in real (inflation terms). But... most of the record was 1Q. I'll nitpick the bears too! ;)

Got Popcorn?
Neil

The Anonymous said...

"While DC could see a balancing out of foreclosures to foreclosure sales in 2009, most of the bubble markets will not."

Agree. For the record, I am still not convinced 100% in what I am saying. I fully acknowledge that there is a possibility that I am too optimistic. For the time being, I am probably 75% in the DC bottoms in 09 camp, and 25% for a 2010 or beyond camp.

I will also say my prediction is ONLY for DC as that is the only market I have been looking at closely. I should also say that I dont think prices in DC rise for years to come. Based on what I read, LA and the other mega bubble marekts are an absolute bloodbath. Out there, the laws of supply and demand seem to be secondary to drivers like panic, fear, etc. I make no prediction as to them whatsoever - they simply make no sense to me.

Incidentally - I think part of our difference in viewpoint is based upon where we live. Like I said LA sounds like a scene out of Mad Max films. I havent been out there, but Harriet and a few others out in PWC report the same sort of thing. How can that not affect their perception?

By contrast, I am looking only in a few areas in Arlington and I see...nothing. To date, (and I am not exaggerating here) I have yet to see a sign that says "foreclosure" or "short sale" or anything. I have yet to see a single restaurant go out of business. I dont know a single person who has lost a house to foreclosure (other than one friend way out past PWC).

Here is a shocker too. Did you know that in all my time of going to open houses 2003-2004 I never once saw a stereotyipcal flipper? Its funny, I used to go with a friend to open houses where they were looking in the exurbs - every 3rd person was a single male with a clipboard in hand. Half those guys knew each other and would compare notes on properties - they seemed to travel in packs together. By contrast back in arlington it was always single families or couples - nothing else.

I still hope I am wrong on this. Maybe it just takes forever for this market to bust open. However this has been soooo long its driving me crazy. I am one of those buyers who can afford to buy now and I will this coming spring if nothing happens on the inventory front (its declining and I want to buy before the bottom because there is still a decent selection). Prices have softened here - probably 5-10% below peak +closing help. Its just notthing like the fireworks I first expected when I heard about "the bubble". God I hope I am wrong!

wannabuy said...

Like I said LA sounds like a scene out of Mad Max films. I havent been out there, but Harriet and a few others out in PWC report the same sort of thing. How can that not affect their perception?
ROTFL. First, I love 'cheesy sci-fi', so you painted quite the image with the MadMax analogy. :)

You have a very valid point. You're in a region doing better than average, so that should improve your outlook. LA isn't the worst of the 'MadMax' regions, but its certainly falling apart economically Partially as LA County, Ventura County, and Orange Counties are the 3 top counties in the US for National mortgage origination! Or... more precisely, they were once upon a time... circa 2003-2006. Note: That isn't a precise number; but mortgage banking was HUGE during the bubble out here.

Its one of the reasons I make a point of pulling apart and taking a national perspective. (e.g., My work coffee club is actually composed of a team from Colorado. A more neutral market which is great for balancing my perspective.)

What's weird is by nature I'm an optimist. So being bearish this long is... weird. And yes, optimistic extrovert engineers are rare. Hence why I manage 4X to 8X as many people as any other manager at my level. :) Heck, I manage 3X as many people as is typical for the pay grade above me! My annual reviews are easy. ;)



I will also say my prediction is ONLY for DC as that is the only market I have been looking at closely. I should also say that I dont think prices in DC rise for years to come.


The main reason I think high end DC will hurt is what the crashing markets are going to do to the mortgage credit availability. That said... If you go back a year, I only predicted an overall decline of 25% for the overall DC market. So far the drop, on a Case-Shiller basis, has been 21%. Will it undershoot? That I don't know for certain. If I did, I'd be able to hire Buffet. ;)

Got Popcorn?
Neil

livinginaustin said...

nice comment... :)

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