Wednesday, November 2, 2011

October housing prices: more evidence of a bottom

- by New Deal democrat

Last month I discussed house prices with the provocative title It's time to admit that house prices have stopped falling October's data only adds further confirmation to that trend. The Case Shiller 10 and 20 city indexes both remained higher than their March lows. Here is the 20 city index (from March 2009 to emphasize the post-crash results, including the effects of the $8000 housing credit):

You may notice the "kinks" in the March 2010 and 2011 data. It's possible that there is a slight problem with the seasonal adjustment for that month. Deleting March, here is how the same graph looks:

With that adjustment, it looks like the trend is that the fall in prices, while not over, is probably within 1% of its bottom.

While the Case Shiller indexes report comparable sales prices, Housing Tracker reports asking prices in 54 metropolitan areas. I follow these because they showed the peak in the housing market at the beginning of 2006 before the Case Shiller sales prices did, and because since then they have led trend changes in the Case Shiller reports by about 4 to 6 months -- which makes sense, since houses are put on the market with asking prices months before they go under contract.

Housing Tracker's data for October is in, and it continues to show that the YoY rate of declines has decreased, now only -0.9% YoY. Here's the updated chart:
Month2007 2008 2009 2010 2011
January ----7.5%-11.5%-5.8%-8.7%
February ----7.8%-12.0% -5.2%-8.4%
March ----8.3% -10.9%-5.0%-7.3%
April -2.7% -8.6%-9.6%-5.0%-6.8%
May -3.5% -9.1% -8.1%-5.0%-5.6%
June -5.0%-9.8%-7.0%-5.0%-4.4%
July -5.4% -10.4%-6.1% -5.1%-4.2%
August -6.0% -10.6%-5.5%-6.1%-2.8%
September -6.2% -11.1%-5.1%-6.6%-1.7%
October -6.7% -11.4% -4.5%-7.0%-0.9%
November -6.6%-11.7%-4.5%-6.7%---
December -7.2% -11.4%-5.6% -7.8%---

Note that the YoY% decline in asking prices bottomed in January of this year. A YoY graph of the Case Shiller data shows that the change in YoY% decline in sales prices bottomed in May and June:

It is important to note that YoY data will not turn positive (or negative) until months after the bottom (or top). For example, nonfarm payrolls bottomed in February 2010. The YoY number did not turn positive until 5 months later, in July. Since Housing Tracker's numbers aren't seasonally adjusted, we have to go with the YoY result, but it is a virtual certainty that at some point in the last 12 months, an actual bottom has already been established.

Why do I track housing prices? In addition to the fact that conventional wisdom, while solidly entrenched, appears to be wrong, it makes a huge difference as to whether any further declines in the housing market are nominal, or only occur after adjusting for inflation (Shiller himself believes another 15% or more decline in real terms is likely, and I do not have any reason to disagree with that).

Sellers who bought a house for $250,000 10 years ago, saw the value increase to $500,000 and then fall all the way back to $250,000 in nominal terms can, even if inflation continues to erode the value of their house by 20% in real terms, still sell their house without bringing cash to the table. On the other hand, sellers whose further depreciation of 20% is nominal (to $200,000), must bring $50,000 to the closing table. You can see that the two scenarios make an enormous difference in the ability of sellers to move, and the likely increase (or not) of foreclosures.

Indeed, comparing nominal Case Shiller values with "real" values adjusting for average wages paid since the beginning of 2000, shows that in real terms, house prices are still falling by about 3% a year - meaning that the average wage earner can afford about 3% more house on an annual basis. Note also that the average wage will buy you more house than at any point since the series began:

Another 4 years of similar real declines will get us to Shiller's 15%+ number -- without any further nominal decline in prices at all.