CASE-SHILLER CONTINUES TO SLIDE - HIGHLIGHTS GROWING DIVIDE BETWEEN DC/NYC AND USA

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This note includes analyses of five home price series: Case-Shiller, FHFA, Corelogic, NAR Existing Home Sales, and Census Bureau New Home Sales.

All five home price series in this note show a notable worsening in the housing market in the most recent month.

Case-Shiller Continues to Fall: 20-City Down 0.7% MoM

The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  

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The chart of year-over-year price change below shows another deceleration in September.

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Looking at the breadth of the data, 16 of 20 cities showed worsening MoM price changes and 19 out of 20 showed worsening YoY price changes.  Las Vegas was the only city to see a better YoY print (though still came in at -3.5% YoY).  It's interesting to note that the overall index figures seem to overstate how "good" things are when put in comparison with the charts below. In other words, the strongest markets are also the heaviest index components: NYC, LA, DC. This is also why the 20-city index looks much worse than the 10-city index. Consider Cleveland, where home prices dropped 3.0% last month (month-over-month) compared with a 30 bps drop sequentially the month before.

 

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It's also interesting to note, as the following two charts show, that those cities with the highest prices are also those seeing the strongest price performance/resilience. Consider the regression line, which shows clearly that higher home price markets are trending better. This is a reflection of the growing divide between Washington and New York and the rest of the country.

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It's evident from the charts above that an equal-weighted average of the 20 cities would yield a significantly more negative growth rate on both a MoM and YoY basis. Specifically, the 20-city equal-weighted month-over-month change was -1.1% compared with the volume weighted average of -0.7% and the 20-city equal-weighted year-over-year change was -1.1%, as compared with the volume weighted average of +0.5%.

Investors frequently look at affordability as a sign that demand is likely to improve.  We have analyzed this data and found that homebuyers usually don't buy low and sell high.  Instead, they buy when prices are going up and sell when they're going down.  There are two interpretations to this.  One is that homebuyers get sucked into momentum moves at the wrong time (much like retail investors in the stock market are generally taken as a contrary indicator).  The other interpretation is that potential homebuyers are not interested in levering up to buy a depreciating asset.  Either way, decreasing home prices aren't a catalyst for demand by themselves.  

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It's critical to understand the timing associated with the Case-Shiller series.  The printed number is a 3-month rolling average released on a two-month delay, so the September release today is the average of July, August, and September.  Case-Shiller measures closing activity, which tends to lag signing activity by 1-2 months. To compare Case-Shiller to the MBA Mortgage Purchase Applications Index, we should look at applications from May/June/July.  Thus, today's Case-Shiller print is the first that does not capture a benefit from the April tax credit. With supply remaining at historical highs, we expect prices to increasingly come under pressure.  The chart below demonstrates.  

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FHFA Home Price Index Shows No Signs of Life

The two greatest differences between Case-Shiller and FHFA home price indices are that Case-Shiller uses a value-weighted approach whereas FHFA uses an equal weighted approach, and Case-Shiller uses a 3-month rolling average whereas FHFA uses the most recent month. As such, sales of more expensive homes have a proportionately larger influence than sales of less expensive homes under the Case-Shiller methodology.

For those interested in how the the FHFA series differs from Case-Shiller, we include a brief description at the end of this note.

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Corelogic Home Price Index Declines Year-over-Year

The Corelogic Home Price Index posted its second year-over-year decline in September.  September 2010 was down 3.5% versus September of 2009.  The only bright spots of improvement in the FHFA Index over the last year have lined up with the tax credits. The chart below shows the trend in home prices.  We include a description of Corelogic's methodology at the end of this note as well.  

 

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Existing Home Sales Median Price Index

The National Association of Realtors publishes the median sale price of existing homes in conjunction with the Existing Homes series.  This series is not seasonally adjusted, so the year-over-year comparison is the right metric to consider, eliminating seasonal volatility.  The chart below shows that the median sale price for October fell -0.9% versus a year ago. Median price fell -0.7% versus the prior month, which is in line with the typical seasonal pattern.  

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New Home Sales Median Price Index

The median price of new homes dropped sharply in October, according to Census Bureau data.  Median price fell 14% MoM to $194,000, the lowest price level since September of 2003.   On a year-over-year basis, median new home prices are down 9.4%. While the series is volatile, this is a significant move worth noting. 

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How FHFA differs from Case-Shiller

Both indices employ the same fundamental repeat-valuations approach, but there are a number of data and methodology differences:

a. The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions FHFA HPI also includes refinance appraisals.  

b. FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices. 

c. 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. FHFA’s index weights price trends equally for all properties.

d. The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHFA’s U.S. index is calculated using data from all states.

Methodology of the Corelogic HPI

Corelogic explains, "The CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic industry-leading property information and its securities and servicing databases. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all home sales. The CoreLogic HPI provides the most comprehensive set of monthly home price indices and median sales prices available covering 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."

Joshua Steiner, CFA

Allison Kaptur