CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS

This note includes analyses of two home price series: Case-Shiller & FHFA.

October Case-Shiller Declines Begin to Accelerate: 20-City Down 1.3% MoM and Down 0.8% YoY

It's official: home prices have resumed their downtrend. While we've been pointing this out for some time, the reality is that the market focuses principally on Case-Shiller as the weathervane for home prices, and Case Shiller now reports that its 20-city comprehensive measure is down 0.8% YoY. While that may not sound like much, consider the trend of the last few months. As recently as May, the CS 20-City index was trending positive 4.6% YoY, and is now, as of October, running at negative 0.8% YoY - that's a 5.4% swing in five months. Six markets are now at new post-bubble lows: Miami, Tampa, Atlanta, Charlotte, Portland and Seattle. For reference, all 20 major cities lost value month-over-month in October.

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.   

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - cs nsa mom

The chart of year-over-year price change below shows the series turning negative in October.

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - cs nsa yoy

Looking at the breadth of the data, 20 of 20 cities showed worsening MoM price changes and 16 out of 20 showed worsening YoY price changes.  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 Atlanta, where home prices dropped 2.9% last month (month-over-month) compared with a 230 bps drop sequentially the month before.

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - 20 city  3

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - 20 city  4

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.

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - scatter  5

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - scatter  6

FHFA Home Price Index Shows a Slight Sequential uptick in the YoY Readings

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.

We attribute the FHFA uptick in October to the foreclosure moratorium in place during the month, which had the effect of suppressing low-ticket foreclosure sales, and pushing the series up in response. We would expect to see the series resume its downward trend next month with the resumption of foreclosures. For those who would prefer to think of foreclosures as the equivalent of "non-core" when thinking about a company's earnings, consider that there are, by Amherst Securities' estimates, some 11-12 million liquidations (foreclosures) yet to work through the system as compared with 1.5-2.0 million that have been completed so far. This would suggest home prices will incorporate this "non-core" element for several years to come.

CASE-SHILLER DECLINES ACCELERATE - SIX MARKETS NOW AT NEW LOWS - FHFA HPI

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

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.

Joshua Steiner, CFA

Allison Kaptur