June 6, 2008 7:53AM
The Difficult Search for the Housing Bottom
By Elizabeth MacDonald
The US housing data is all over the map. The disparate data comes as federal regulators grow increasingly concerned that banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt.
Exactly where house prices are is important information the markets need now. Goldman Sachs looked at 24 house price busts with declines of more than 15% since the ’70s across 15 countries. On average, real house prices tended to fall around 30% and only bottomed out after six years. That’s pretty much what the market is looking for.
Standard & Poor’s widely followed S&P/Case-Shiller index says that house prices are now down 16%, in nominal terms, from the peak hit in the second quarter of 2006. Housing prices rose 132% from 1997 to peak by the end of the first half of 2006, the biggest housing boom in US history, the index says.
But according to available data from the Office of Housing Enterprise and Oversight, U.S. home prices have declined by a seasonally adjusted 3.9% after the index hit its peak in April 2007. That’s right. Just 3.9%.
What gives? There are wide disparities in how each housing price index is calculated.
The S&P/Case-Shiller home price index is thought to be intrinsically gloomier than most housing indices because it only uses purchase prices from sales of homes. It doesn’t factor in new appraisals from refinancing deals or remodeling values.
The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. It’s notably pessimistic as it’s now heavy with distressed transactions of homes backed by jumbo loans along with those backed by subprime loans. Case-Shiller also lags the market by about four months, so we’re seeing prices for January.
Meanwhile, the government home-price data from OFHEO do not include jumbo and subprime mortgages as Case-Shiller does. And the geographic coverage of the indexes differs.
OFHEO’s U.S. index is calculated using data from all states. OFHEO offers data for over 400 different census, state and metropolitan statistical areas versus only 20 major metro areas for the CSI. However, critics say OFHEO data is thin in hard-hit markets like Florida and California.
The quirks in housing data don’t stop there. The Commerce Dept. recently reported that sales of newly constructed single family homes rose in April for the first time in half a year. Sounds great right? Wrong. Buried in the data is the fact that the prior six month’s data were revised downward, so it made the comparison look a lot better.
The housing data matter in particular for banks trying to set up the right loan loss reserves. Wachovia in mid-April cited the milder OFHEO data to forecast that the U.S. housing crisis would end in “mid-2009″ and that prices would fall an additional 6.8% before then, or 12.9% from their peak, the Wall Street Journal reports. Mid-April was when the Charlotte, N.C., bank reported a first-quarter loss and raised $8b.
Similarly, when Seattle-based Washington Mutual posted a $1.14b net loss for the first quarter, chief executive Kerry Killinger used Case-Shiller data to show investors the magnitude of declines in housing prices. But when WaMu assessed the current value of properties backing its mortgages, WaMu used OFHEO data, the presentation’s footnotes suggest, the Wall Street Journal reports.
That’s just a sample of some of the dubious data that’s been on my mind. Here’s more:
- A critically important market for derivatives, the credit swaps market, now approaches an estimated $65T. But nobody in this galaxy knows what the exact figure is, instead, computerized black boxes loaded with algorithms and ‘binomial trees’ conduct these trades away from the major exchanges, leaving market regulators in the dark;
- Oil supply and demand data tracking systems in emerging markets such as Russia, India and China are either as transparent as a vat of molasses or simply don’t exist, causing oil prices to whipsaw as speculators try to fill in the blanks (see prior blog “Why Suing OPEC Won’t Work “).
- Similarly, OPEC’s output data is unreliable, often because member countries don’t want to admit they’re producing above OPEC’s quotas. The markets must then rely on data from unofficial “tanker trackers” like Lloyds Maritime Information Services or Petro-Logistics SA, a teensy company that operates upstairs from a grocery store in Geneva, Switzerland.
- Watch China’s poor oil data. There are thousands of so-called teapot refineries all over China” that are left out of China’s official statistics, Business Week reports. China appears to be creating a strategic stockpile of oil, but has never acknowledged it, says Eduardo Lopez, senior demand analyst for the Paris-based International Energy Agency, an affiliate of the OECD. Lopez says Russia produces “awful data” and reliable demand statistics are scarce in countries like India and Indonesia.
- The scarcity of good global data is a key reason why it’s impossible to know for sure whether the next “super-spike” in oil in the coming three or four years will be up to $200 or more…or down to $80 or less.
- Over the past 25 years, actual federal tax revenues in any given year have averaged $150 billion (in today’s terms) above or below the revenue levels that the Congressional Budget Office predicted a year in advance, analysts note, due to static, not dynamic, estimates.
Comment by wayout
Jun 6th, 2008 at 2:09 pm
Maybe when the average home buyer can afford a home without spending 30%-50% of their income on a house payment will the market correct itself. Homes are still unrealisticly high in a number of markets…they have to come back down to levels that a majority of people can afford, so I tink we are in for more pain overall, especially those places that simply had overheated markets..
Comment by DrDetroit
Jun 6th, 2008 at 5:14 pm
Looks like credit swaps derivatives are approximately 1/2 the entire planets GDP. I read the planet - all nations collectively are approx 130 Trillion. Further I’ve read collectively all derivatives are over 560 trillion but you have me thinking now that if so many transactions are via black box - how can I rely on the 550-560 trillion estimate.
You’ve taken some time to put forth a meaningful contribution - so I should try to do the same. If anything, you encourage constructive criticism - so as to the 65 Trillion estimated for credit swaps, I have to stop and ask who estimates this, and what are the contributing causal factors.
I always liked the scene in China Syndrome with Jack Lemmon where he’s tapping the water level meter -and they ‘think’ there is an emergency in the nuclear reactor so they dump the water, THEN he finds out it was a faulty meter, and tapping it again it drops - at that point he realizes he came close to a fission meltdown.
Your thoughts here on integrity of data, further, the means and ways even of gathering data (you did leave out the analytics side, but hey, what good ARE analytics I suppose [this might be your point as well] if the data isn’t reliable) do raise question as to necessity of good data before anything else.
Dubious Data is a fine way to put it if you ask me, I suspect there is room for an entire book on this.
Same is true in any analysis, medical, economic, if the data isn’t there, or able to be consolidated, we’re in dartboard mode.
I WILL say on oil futures mentioned above I really do think one serious impact on futures is the shift of investments prior from the stock market into futures. I saw the head of Sallie Mae speaking on c-span regarding their student loan dilemma and he pointed out so many pensions used to ride on the backs of the student loans (neat idea if you ask me, that the young would in turn be helping the retirees portfolios, providing it worked, and it did up to the point where 160 basis points wasn’t enough according the CEO of SM for maintain profitability), and he got me thinking, ok, if pensions USED to ride on loan products such as these, and these are drying up ? where will they shift to ? Gold ? too volatile ? I think they in part shifted to petro.
Oh well
Considering I got banned from MarketWatch today for promoting a bit TOO much that Fox News is now calling the shots for MarketWatch, I end up here - to which MacDonald PROBABLY says - ‘oh great, lucky me !’ ha.
Well, I find this authors insights and passion to their work as good as it gets.
Hey Liz, I know where you could go and make a difference (if say, indictments come down the chain stemming from Ailes), but it might not be such a public position, I bet Buffett would pick you up (COMPANY wise I mean, although 1/2 his age, ok, 1/3 his age, you two WOULD make a darn cute couple).
I recall something Warren said once regarding his higher paid employees - he goes “We like to keep people we care about” I bet you’d rock at Berkshire Hathaway, and I bet they’d keep paying you more not to leave. Not sure if Fox would do that. In fact, I don’t see your picture on the Fox Business News team there of 20 or so people, and darn it, you’re at the core of what integrity comes through from that network - granted Cavuto is likely over 135 IQ, but he tends to get personally involved in his messages. I’ll NEVER forget when he interviewed Alan Greenspan, said ‘we have to take a break’ Alan said something like ‘You mean, you have to sell a commercial’ And guess what the commercial was ? CountryWide (this was this year - AFTER CW fallout). Shame on you Neil. Shoulda let Liz interview Alan. I’ve never seen MacDonald ever be disrespectful.
Comment by Rob
Jun 6th, 2008 at 6:26 pm
Kudos - an analyst that analyzes the shortcomings in data rather than stringing together bad data.
Data collection & analysis isn’t sexy & consumers of the data often don’t know how to question it.
Your article addresses the problems quite well. Is anyone doing anything to collect better, more real time data? This isn’t rocket science.
Comment by Paul
Jun 6th, 2008 at 11:59 pm
I totally agree with what “wayout” says about people being able to afford their home. One of the key factors I see is that the affordability stems from folks not getting paid any more at work as necessary goods are rising. Both family members have to go out and work whether that is the way they want it or not. All this talk about less spending at the clothing store or at your favorite restaurant would change if there would be better, higher paying jobs. I think what is happening around us is horrible and probably hurting a lot more families than we all know.
On another note, maybe we could stop funding “some” space craft to get closer than we have ever been to the sun and use that money to create a few jobs for some analyst to straighten out the numbers for “The difficult Search for the Housing Bottom.” Nah, that would be too genius for our Government.
Comment by Dave
Jun 8th, 2008 at 1:50 pm
Your article is full of data that sets me afire. Here are two things that need more transparency. l. Builders profit on a singe housing unit. 2. Real Estate commissions.
Builders sre walking away from home closings making a whopping 35 to 50 percent markup per home sold. This is far too much. Real Estate Brokers pick up a check a home closings for 4 to 10 percent based on gross selling price. This is not only stupid, but downright white collar theft in my opinion. Not one builder or Relator earns a fraction of the money dolled out by the purchaser of one of their homes; these greedy profiteers keep hordes of first time buyers in apartments and not in the home they deserve in this Nation. I say you guys that have the ability to “spill” out these horiffic profits being made by builders and Relators should make it public so all will be aware of how bad they are being ripped off. Sad situation that no one seems to have the will to address.
Comment by Andrew
Jun 11th, 2008 at 10:41 am
@Dave:
That’s misguided. Every manufacturer has to make a profit on their products, or they stop making them. If the profit is unreasonably large, there will be many competitors, and some segment of producers will make the product more cheaply. House construction is not patented.
Yes, quality of construction has gone waay down in the last few decades, but it’s because customers (you and me, though probably not You and definitely not Me) are demanding giganto things that we don’t need, can’t afford to build well, and lately can’t even afford to build poorly. Builders will build whatever the market asks for, and make as much profit as they can. Like every other business in the modern world.
And, look a little deeper and you’ll find that after several years of huge profits (due to govt policy and lax lending restrictions), builders have overbuilt their products, have overbuilt their companies, and will be trying to dig themselves out of this hole for many years. Now is an awful time to be a builder, especially if you specialize in faux-lux. Those huge crappy houses will be around for DECADES, long after they’re firmly established as embarrassingly unfashionable.
OTOH, we agree that real estate commissions are silly. The Nat’l Ass’n of Realtors owns the MLS database (local associations own local MLS), which is 90% of the value RE brokers offer. It’s a classic disparity of information problem, and it has been the mainstay of the real estate business for decades — a huge disservice to both buyers and sellers. It has survived surprisingly well in the wake of the Internet. Still, it won’t be long before public (or at least openly-licensed) MLS-like data exists. Now is an awful time to be a real estate agent.
Home-seekers have options: you can build a reasonable and responsible house that fits your needs, or you can buy an appropriate (probably older, 20-30 yrs or more) house that is for sale by owner. Either option will let you avoid being a part of the ugliness and inequality that is status quo out there. Either option would require much more active participation on the buyer’s part. We pay for convenience, and in many cases we accept substandard and overpriced services, as long as they’re convenient. This is no different.