September Resale Data Rodeo

Submitted by Rich Toscano on October 12, 2008 - 11:49am

Based on the latest month's closed home sales, my simplistic but thus far pretty effective Case-Shiller HPI model forecasts a September decline of 3.0% for the HPI:

This is about the same as the projected August drop of 2.9%. Unless the single family median price per square foot is throwing off bad signals, it appears that home prices have accelerated their decline as we've come out of the "spring rally" (which in this market just means that prices declined at a slightly slower pace).

Here's a look at the size-adjusted median for both property types.

And the vanilla median:

Volume was very strong in September -- the highest September in 2 years:

And inventory was flat:

Leading to a 2 year low in months of inventory for September:

This is usually the part where I say, "yeah, but..." and put up a scary chart of foreclosures and the pent-up distressed supply that they represent. But what's this?

The market hasn't rocketed back to health, however... as described in the prior Voice post this is in all likelihood an artifact of the new state law that inserted an extra 30 days into the pre-NOD process. Meaning that NODs will probably be back to their former world-beating levels soon.

Looking forward, there are a couple of other elements to consider.

On the negative side, it's very clear that the economy is in recession and that job loss could get worse -- and not just in the housing-related industries this time. That's certainly not good for an already ailing housing market. One of my little theories has been that the higher-end areas might start to lose their lustre of quasi-invincibility if the housing downturn started to be driven more by job loss than by risky mortgage explosions. (I base this on the fact that in the 1990s bust, which was primarily unemployment-driven, high-end areas took their licks with everyone else).

On the positive (for home prices) side, the government is throwing everything they have at it. In the last rodeo, I put up a list of actions that the feds might take to prop up housing:

  • loan principal reductions (the government does after all pretty much own the mortgage market at this point)
  • bans on new foreclosure activity (ditto)
  • forceful lowering of mortgage rates (as suggested by Bernanke in his infamous 2002 speech on deflation)
  • helicopter money (aka "stimulus checks", also proposed, more or less, in the same Bernanke speech)
  • who knows what else

I forgot an important one at the time: reset bans. People talk a lot about the wave of option ARM recasts in 2010, but that's a long time from now... the government may well put limits on how much payments can be reset upward. At this rate, I think this is likely -- especially since, courtesy of the Paulson plan, the government may become the owner of a lot of these mortgages.

This week, McCain came out and said he would throw money at buying mortgages and writing down the principals. Many of us have expressed concern at the unintended consequences should they cross the loan balance reduction Rubicon. Nonetheless, the "Everyone Should Stop Paying Their Mortgages Act" seems like it is very much a possibility given the level of government desperation to stem the bleeding by any means necessary.

All in all there are serious market distortions going on, many of which are intended to attempt to offset the negative effects of the credit crisis and economic slowdown.

As a result of all these crosscurrents, forecasting the long-term future of the real estate market is becoming an ever more sketchy proposition. Near-term, it looks like more of the same.

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Submitted by patientrenter on October 12, 2008 - 9:24pm.

Rich, you express very well what I, and likely many readers, feel is the current situation. Do you have any thoughts on what the limits are to the government intervention?

My own uneducated view is that the govt distortion in house prices is limited only by the inflation that will result. So the sequence is:

1. Pour ever-larger amounts of govt money into housing (probably into the multi-trillions), until prices stabilize well above their free market levels

2. Govt borrows much more to fund the housing market intervention. Keep offering loans with low initial payments and fixed interest rates to home buyers

3. After a while, foreigner appetite for US sovereign borrowing is sated and interest rates begin to rise

4. Print money to substitute for borrowing from foreigners

5. Inflation gets going in earnest

6. Borrowers who borrowed with low initial payments and fixed interest rates win, because all their debt payments shrink in real terms. Savers/debtholders lose.

7. As nominal house prices start to go up of their own accord because of inflation, start to remove the most extreme govt mechanisms that distorted the market

8. Begin to combat inflation, but not so vigorously that it is killed quickly. Gear up slowly. After ten or so years, it finally subsides, but now most prices are double their prior levels, except for house prices.

9. [Warning, political cynicism here] A new steady state is reached, and 2020 is rung in, with celebrations that govt has bravely and skillfully fought and won 2 economic wars sprung on it by the vicious markets - against asset price deflation first, and against consumer price inflation next. Political leaders who put on the grand play are hailed by the populace, who don't understand both sides of the war were carefully managed all along.

Submitted by rob_sd on October 13, 2008 - 12:23pm.

I agree with your analysis of what the gov't is trying to do in the 9 step, 12 year plan above... :-)

But could the plan fall apart? Is it possible that somewhere during steps 3,4,5 people lose faith in US gov't treasuries or even worse US gov't defaults on it's debt?

Submitted by Rich Toscano on October 15, 2008 - 6:42pm.

Patientrenter, sorry for the delayed reply. I really enjoy your posts and I think we see eye to eye on a lot of things.

I think your 12 step program, as it were, sounds pretty good. I don't pretend to know the exact sequence of events of course... but i think it's pretty inevitable that all these programs will lead to more borrowing, and that they will then eventually lead to more money printing (either to pay back what we've already borrowed, or to substitute for a lack of new lending, or both).

I think this will put upward pressure on housing -- eventually -- because a lot of the money will be shunted directly from housing, but also because if we get more generalized inflation it will raise rents and incomes and thus improve housing fundamentals.

After that it's hard to tell... I'm hoping a Volcker type comes in to layeth the smack down but who knows. For now, though, it seems to me the the govts are desperate and at the end of the day, there is only one dial they can turn and that is fiat money supply.

Rich

Submitted by ESK on October 22, 2008 - 9:35am.

Great article! It will be interesting to see what effect the government's plan will have. I'm somewhat concerned this is just delaying the inevitable.

Recently, I’ve noticed that there is a new house price index that comes out before Case-Shiller’s and reports on a national and county level. This new index, IAS360 HPI was created by Integrated Asset Services who deal with default management and residential collateral valuation. It’s interesting to see in their data for August, that house prices are continuing to see declines in all three regions except for the Northeast… I’m convinced that this is truly the index to keep your eyes on if you’re trying to get a glimpse of recovery…Has anyone else been following this?

http://iasreo.com/ias360update.html

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