Home prices fell 9.4% in September, according to the widely-respected S&P/Case-Shiller housing index. Analysts had been looking for a 9.1% decline, so this is a bit worse than expected.
On a sequential basis, home prices rose .3%, again, a bit worse than the .8% analysts had been looking for. The market is now back to where it was in Fall 2003.
The housing market is creeping back, but at a pace disappointing to the bulls.
Speaking on CNBC S&P’s David Blitzer said the report showed clear signs that the strong momentum seen over the summer is starting to crack.
Case-Shiller CPI is formulated by substituting the Case-Shiller housing index for Owner’s Equivalent Rent in the CPI. For a complete description of the reasons and methodology, please see What’s the Real CPI?
The chart and commentary below is courtesy of my friend "TC" who writes:
CS-CPI continues to fall albeit at a less rapid pace and measures -5.1% YOY. Meanwhile the government’s CPI-U also continues to fall at a slower pace and measures -1.5% YOY. The divergence is to due to the government’s housing metric of Owners’ Equivalent Rent (OER) continuing to show price increases (+1.7% YOY) vs. Case-Shiller data showing price decreases (-13.3% YOY).
click on chart for sharper image
Since the Case Shiller housing market peak in June 2006, OER is up +7.7%, while the Case-Shiller index is down -30.9% - an amazing 3860 basis point divergence!
CS-CPI YOY has now fallen for 11 consecutive months and 14 of the past 18. Meanwhile the government’s CPI-U YOY has fallen for 6 consecutive months.
Thanks "TC".
With rental prices and food prices starting to drop, I expect to see CPI-U (the official CPI) to continue to decline. Moreover, with the coming end of the $8,000 housing tax credits for new home buyers and a phase-out of treasury monetization by the Fed, a reversal in the housing index is likely.
It’s highly unlikely that home prices have bottomed in the bubble areas as well as most major cities, even though some select markets, especially Florida areas that have been hammered mercilessly, may be in a bottoming process now.
Dr. Housing Bubble outlines a solid case for "the bottom is not in" viewpoint in Shadow Inventory Case Study. Please take a look. It’s a good read.
Over the past couple months, I have had many people tell me "the housing bottom is in". Supposedly the stock market bottom is in as well, and in just a couple years the S&P will be back at 1500. Really?
Any optimist talking up a housing recovery might want to pause and look deeper into the housing crisis. Amherst Securities Group analysts believe the market faces about 7 million properties that are likely to be seized by lenders have yet to hit the open market. There are two sources that contribute to a huge shadow housing inventory; ARM mortgages which are due to reset now through 2012 and current home owners who are struggling to make payments.
Assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman.
The favorable seasonality will be over come the October housing numbers and the reality of a 7-million-unit housing shadow inventory is likely to set in.
The uptick in the housing numbers are due to banks slowing down the filing of forecloses due to the government loan modification program, the spring/summer seasonality strength of the housing market, buyers rushing to take advantage of the soon to expire $8,000 first-time home buyers credit and the record low mortgage rates thanks to the Federal reserve buying treasuries to help keep mortgage interest rates artificially low but that program is due to be over during the 1st quarter of 2010.
When the shadow inventory is unleashed and government is out of stimulus gun powder for the housing market, reality that the housing correction is not over will set back in.
I’ll jump back into posting with a few thoughts on housing.
First, Case-Shiller as out with its July home price survey. It followed the trend of improving prices established over the last couple of months. Nationwide prices were up 1.6% and the number of cities showing price declines dwindled to just two. Here are the numbers for the twenty cities in the survey.
(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)
Whether these numbers represent a sustainable recovery for the housing market or just reflect the impact of low prices, pent up demand and government subsidies via low interest rates and tax credits is a matter of much debate. There is a considerable body of opinion that holds significant problems lie ahead inasmuch as there is considerable inventory yet to hit the market. That meme has been bandied around for some time with little data actually prove the thesis.
During the depths of the recession and particularly while housing looked as if it had an impossible mountain to climb, it was pretty much an article of faith that the largest impediment to clearing the backlog would be the lack of financing as lenders returned to sensible underwriting standards. The logic being that fewer new buyers would be able to pony up larger downpayments and that even when they could do so, qualification criteria would winnow the number of eligible borrowers.
Of course, that didn’t occur simply because FHA stepped into the breach with its traditional minimal downpayment loan product. As Fannie and Freddie have pulled back and watched their loan portfolios grow little and the private mortgage market has virtually disappeared, FHA has expanded its insured portfolio. The Wall Street Journal had this to say about the growth of FHA’s portfolio:
The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA’s insurance portfolio will have expanded to $1 trillion…
I think so and have said so repeatedly but here’s a genius who thinks so too (the mark of genius in a person being the extent to which he agrees with you). The pessimist’s argument is that the only high end houses currently selling are those bought pre-bubble for, say, $1,000,000. Their owners watched the value soar to $2.5 and then drop to $1.5 but they still have equity they can cash out and use to buy a cheap house in a retirement spot. The C/S index would be really whomped, the argument goes, if it accurately reflected the loss of value of all those houses that aren’t selling.
Of course, Case-Shiller reflects actual sales, not present value of houses still unsold and since they aren’t selling, the index is accurate, as far as it goes. But if the homes with no remaining equity ever do begin to move, either through foreclosure or abandonment (not a problem in Greenwich, yet, but I’m hearing reports of it happening in Stamford, in good neighborhoods), watch out.
The June Case-Shiller numbers are out and as expected they indicate further firming of the housing market. Before I get to them let me first note the consumer confidence numbers.
The NYT reports that consumer confidence as measured by the Conference Board was up to 54.1 in August from 47.4 in July. Economists had expected an increase to 47.5. A healthy reading is around 90, so to say the least we have some room yet for improvement.
Now on to Case-Shiller.
The 20 city index was up 1.4% in June which was triple the increase in May. On an annual basis the decline in home prices slowed from 15.4% from 17.1% in May. Seasonally adjustments show that May was actually a flat month and June prices increased 0.7%. Only two cities showed a decline in prices in June on an unadjusted basis and five saw price declines on an seasonally adjusted basis.
About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)
Home Prices, by Metro Area
Metro Area
June 2009
Change from May
Year-over-year change
Atlanta
107.52
1.5%
-13.7%
Boston
152.71
2.6%
-5.9%
Charlotte
120.66
0.7%
-9.6%
Chicago
124.99
1.1%
-16.7%
Cleveland
106.38
4.2%
-3.0%
Dallas
119.68
2.7%
-2.2%
Denver
126.92
2.5%
-3.6%
Detroit
69.49
-0.8%
-25.0%
Las Vegas
107.31
-2.0%
-32.4%
Los Angeles
160.90
1.1%
-17.8%
Miami
145.37
0.5%
-23.4%
Minneapolis
113.48
3.1%
-19.8%
New York
171.49
0.4%
-11.9%
Phoenix
104.73
1.1%
-31.6%
Portland
148.47
1.0%
-15.2%
San Diego
147.31
1.6%
-16.0%
San Francisco
124.70
3.8%
-22.0%
Seattle
149.53
0.4%
-16.1%
Tampa
140.90
0.4%
-19.5%
Washington
174.32
2.8%
-11.8%
And with that let the debate begin to rage. Is it real or just a head fake? Lots of investors and first time homebuyers chasing low priced homes and tax credits or a reversal in the trend of falling homeownership rates? Are foreclosures close to peaking and thus supply coming back in line with demand? Has the expectation of falling home prices been expunged from buyers’ psyches or are they still leery?
Lots of questions, precious few answers. The data all summer has been on the positive side but the skeptics still have lots of credible objections to support a false start hypothesis.
I’m solidly planted on the fence. I think the recent sales and price data are pretty positive but I don’t dismiss the skeptics’ points. I don’t think we have a healthy real estate market with so much of it concentrated in a niche of the market and dependent upon investors and marginal buyers. Of real concern, is how much of the recent activity is a “cash for…
THERE are tentative signs of stabilisation in America’s housing market. The S&P/Case-Shiller index, which tracks home prices in 20 cities, ticked up slightly in May, its first gain in 34 months. New construction of single-family homes rose in July for the fifth straight month, while sales of existing homes are expected to show their fourth consecutive month of gains when latest numbers are released on August 21st. Dig deeper, however, and the recovery’s foundations look shaky. A glut of supply will also weigh on prices, thanks to a wave of repossessions. Seized properties now account for almost one in four sales. Some 23% of homes with mortgages are underwater by one estimate, and others are even higher. Deutsche Bank’s securitisation team expects negative equity to peak at 48% of total homes by 2011.
Inquiring minds are pondering a few charts from my friend "TC" who has plotted the Case-Shiller price history since 1995 for 20 cities. Please click on any chart to see a sharper image.
Absolute Price History 10 Cities
[click on charts for larger views]
Absolute Price History 10 Additional Cities
Relative Price History 10 Cities
Relative Price History 10 Additional Cities
May 2009 vs. April 2009
Thoughts From "TC":
Much has been made about prices "hitting bottom" and the market showing signs of stabilization. However, when one dives just a bit deeper into the numbers, it appears the increases are not much more than seasonality.
Another reason for the small price incline on a month-over-month basis is that May 2009 data is the first full month of data since the Federal $8000 Tax Credit took effect (the bill actually passed in mid-February, so March was the first complete month, but escrows aren’t typically closed and sells recorded until May).
In order to showcase how small these price increases actually were in dollar terms, I’ve included a new chart which the price differences of May 2009 vs. April 2009 for all 20 cities tracked by Case-Shiller. The changes range from a gain of $5,800 in San Francisco to a continued drop of $1600 in Miami - no city experienced an increase any where near the $8000 Federal Tax Credit.
Median national prices have now fallen 32% peak-to-trough over the past 3 years or $80,000. In the 20 cities that Case-Shiller tracks prices have fallen from 8% in Dallas to 55% in Phoenix. Price declines are highest in CA, NV, AZ, FL and Detroit. In nearly all of the cities prices have now declined back to early 2000 prices and thinly traded futures data points to a bottom occurring in the next 12 months.
It is important for readers to know that Case-Shiller uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, there are two newer columns titled "Price Level" which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.
Once again included absolute and relative price charts. The relative charts are based upon a year 2000 equal point for the 20 cities and the absolute price chart helps to show the current price declines.
We started the quarter off well enough, with the Dow at 7,522 and S&P at 787 on April 1st, we flew right up to 8,000 on the Dow and 840 on the S&P the next day but then it took us the rest of the month to gain 200 more points and the last day of May we finished at 8,500 Dow, S&P 920 - nothing to write home about on the whole. June 1st was very exciting as we made all our gains for the month that day, flying up to Dow 8,800, S&P 944 but that’s where we called a top and cashed out and it’s been pretty dull ever since as we’ve bounced up and down between 8,800 and 8,300 on the Dow and 940 and 900 on the S&P, waiting for a breakout one way or the other.
It’s dull to stay in cash, it’s like going to the track and not betting on any races. We really thought we’d get a proper indicator by now and we had fun betting the downturn from the middle of June but even that fizzled and left us back in cash as we head into the holiday weekend. On the bright side, the VIX has come down substantially and we are now able to pick up long options again at reasonable prices. This will be fantastic and give us some great leverage but we still need the market to pick an actual direction.
At least now we have earnings coming so we can evaluate various sectors and place some bets for Q3 but index buying has ruled Q2 and the performance of individual stocks has been washed away as a factor as machine trading has yanked the broader market up and down on a daily basis. It used to matter how IBM or INTC was doing as an individual company, now the entire Nasdaq can fly to the moon and take PALM, AAPL and RIMM with it, even though it’s not very likely that all can do well in the same space for very long (remember MOT?). We are no longer deluding ourselves that 2Bn people in Asia and Africa will be sporting the newest smart phones on the beach next summer yet the pie in the sky valuations persist, as if there is infinite room for all competitors to sell in the global marketplace. In fact, emerging market valuations are are…
The report is 69 pages almost all of them loaded with charts. I took a liberal selection below, adding plenty of comments, but please take a look at the original article for many additional charts. All charts below are from the article. Click on any chart to see a sharper image. Quotes from the article in italics. My comments are in plain text.
Case Shiller vs. Lawler
Nearly everyone is familiar with Case Shiller. I suspect most have not heard of Lawler. Interestingly there is a feud of sorts between the two as noted by the Wall Street Journal article Outlook for Home Prices Clouded by Spat Over Historical Trends.
Yale University economist Robert Shiller has often dazzled audiences with a chart showing home prices from 1890 to present. Someone even used Mr. Shiller’s chart to make a YouTube video that puts its viewer on a roller-coaster ride over peaks and valleys in home pricing. It’s a bumpy ride.
Now another economist, Thomas Lawler, says Prof. Shiller’s chart is "bogus." Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making "wild allegations."
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away.
But that doesn’t stop analysts from extrapolating from what may be dubious data. In a March 30 report, T2 Partners LLC, a New York hedge-fund manager, drew on the Shiller chart to conclude that on average U.S. home prices need to drop another 13% to get back in line with the long-term trend.
Mr. Lawler has created an adjusted version of the Shiller chart, backing up his view that house prices already are nearing a bottom in much of the country. A T2 partner called Mr. Lawler’s critique "valid."
I guess we need to define "nearing a bottom". We also need to look at concentrations of houses. Does it matter much if home prices are bottoming across vast sections of the farm belt with low density houses if the…
Truthfully, I have not surveyed our ursine friends this morning, so I really have no idea if they are emboldened by the low CBOE equity put to call ratio (CPCE), but they should be.
My preferred way of looking at the equity put to call ratio involves using an exponential 10 day moving average (EMA) as a smoothing factor. The 10 day EMA generates the dotted blue line ...
Bernanke's ludicrous monetary policy has forced financial companies to relever to mid-2000 levels. A recent CLO has broken the 12 month quiet period in the structured finance universe, and finally made it all too clear that bankers and asset managers have no idea what to do with all the free extra money lying around, earning nothing on the short end of the curve. Furthermore, with rampant M&A rumors every day (of which 90% are patently false) private equity must be getting nervous. As we all know, with great free money comes great irresponsibility to do really dumb things, better known as LBOs. We analyze the imminent tidal wave of going private deals, which, if Bernanke keeps ZIRP for another year as is widely expected, is just around the corner, and that the record TXU LBO of 2007 will be promptly surpassed, in both size and idiocy. Oh well, if you can't beat them, join them...
Truthfully, I have not surveyed our ursine friends this morning, so I really have no idea if they are emboldened by the low CBOE equity put to call ratio (CPCE), but they should be.
My preferred way of looking at the equity put to call ratio involves using an exponential 10 day moving average (EMA) as a smoothing factor. The 10 day EMA generates the dotted blue li...
As I always do before options expiration I reviewed our Buy List, which, this quarter, is a list of 37 stocks we've been playing since late December and, sadly, after reviewing 37 of our favorite investments very carefully this week - I could only conclude that cashing them out was the only decision I could be comfortable with this week. Of 66 trades we had on our 37 stocks, 64 are winners with an average return since 2/8 of 28% - since most of the trades were designed to make 40% for the year - it just seems silly not to take the money and run now, on March 19th.
You are not supposed to have 64 out of 66 winners in 6 weeks, you are not supposed to make 3/4 of what you anticipate for the year in 6 weeks - that is NOT how the markets are supposed to work! When the ma...
Today’s tickers: BBY, DNDN, GLD, BAC, AET, BA & NBR
BBY - Best Buy Co., Inc. – Shares of the world’s largest electronics retailer rallied 2% to $41.25 during the trading session after receiving an upgrade to ‘buy’ from ‘neutral’ at Goldman Sachs Group where analysts increased BBY’s target share price to $47.00 from $44.00. Options traders employed a few different bullish tactics to position for continued upward movement in the price of the underlying stock through expiration in April. Plain-vanilla call buyers targeted the April $44 strike to purchase 5,100 calls for an average premium of $0.55 apiece. These investors stand ready to accrue profits if Best Buy’s share price increases 8% from the current value to exceed the effective breakeven point on the calls at $44.55 by expirati...
Let's take a look at Insider Buying and Selling over the last week or so. These are screen shots from Finviz - the significant buys against a green background first and significant sells against the pink background second. All the buys fit into my screen shot but the sells did not. Click here to see all the sells.
Note that the largest buy in the group, for KITD was at a price of 9.73 (KITD is currently at 11.54). The buy was part of an Equity Offering rather than an open market purchase. Tuzman Kaleil Isaza's (KITD's Chairman and Chief Exec. Officer) history of buys is http://www.insidercow.com/more from Insider
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(