Trends in home values: becoming murky

by Rebecca Wilder

Actually, murky is something of a good thing when referring to business cycle dynamics. It usually means that a bottom is forming.

In some sense, the key to recovery is the stabilization of home values. If home values would just “stop” declining – I understand that there is a market mechanism going on here that is pushing home values to (or even below) an equilibrium – then the banking system can get on with its solvency issues. (Naked Capitalism has a nice piece today on banks not foreclosing in order to avoid further writedowns.) Let’s see what’s going on in the US from the perspective of several indicators.

The S&P/Case-Shiller and the Federal Housing Finance Agency (FHFA) reported their quarterly house price indexes today. Interestingly enough, the two (Q2 2009)reports diverge.

The S&P/Case-Shiller marked a quarterly gain of about 1.4%, while the FHFA reported a quarterly loss of about 0.7%. Is this the start of an interesting story on the downside? On the upside, the Case-Shiller index showed a much larger bubble in home values relative to imputed rents. Will the FHFA show a deeper trough than the Case-Shiller?

The chart illustrates the price to imputed rent ratio for the two measures of national real estate values. This can be thought as the tangible asset equivalent to a corporate stock price to earnings, or price to dividend, ratio. It measures the value relative to the flow of ownership gains, as represented by the imputed rent series measured by the BLS (owner occupied rent in the CPI table).

It is unlikely that the quarterly FHFA index will depart from the positive trend for too much longer (if indeed, it has stabilized), as the monthly index is showing more consistent gains over the last three months.

This is kind of interesting – the Case-Shiller, which includes foreclosures, is likely catching the upswing in foreclosure demand, while the FHFA is grabbing more of the downward trend in the “average” mortgage. But the LoanPerformance home price index likewise includes subprime loans and foreclosures, and it is showing some life (see chart below). Below is the 3-month annualized growth rate over the last two years for a cross-section of home value indicators. (In most cases, the monthly indexes are a subset of the national index.)

One indicator to note is the LoanPerformance house price index (LPHPI), which is used by the Fed to estimate the value of real estate in the flow of funds accounts, and is growing at a 9.1% annualized rate. States seeing at least a 4% 3-month gain include Ohio, Wisconsin, New York, Virginia, South Carolina, Georgia.

Likewise, the median existing home price and new home values are reported. These series are not seasonally adjusted; and therefore, are not extremely helpful in this context. But the 3-month existing home values remain in positive territory, although at a slowing rate of improvement. It should be noted that the median home prices is a cruder measure of home values – the Case Shiller and FHFA were developed in order to overcome the limitations of thinking in terms of the “median”.

So it looks like there is a chance that home values stabilize before 2010. We will see, as a 1 quarter increase by the Case Shiller index, although positive, is far from a trend.

Rebecca Wilder

(Edited slightly for readability….rdan)

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