- More on what I think was a “weak” Case-Shiller report yesterday
- Decomposing the 6.9% QoQ increase being viewed as wildly bullish
I am getting a decent amount of feedback on the large 6.9% Q1’12 to Q2’12 jump in the national composite index. To me this is apples to carrots and tells us nothing we don’t already know; that “prices” people “paid” for houses in Q2 QoQ jumped almost exclusively on stimulus and transitory events…”Twist”, the election cycle foreclosure abatement positive mix-shift, and weather pull-forward effects. With respect to the Q1’12 Case-Shiller, it includes little if any Twist, Foreclosure abatement, and weather benefit. Bottom line, comparing the Q1’12 to Q2’12 is comparing a period of no stimulus to a period of full blown direct housing market stimulus. It’s also important to point out that Q2’12 YoY prices were only up 1.2%, which is weak on a stimulus adjusted basis.
On Q1’12 vs. Q2’12 Case-Shiller Apples to Carrots Comp Decomposed…
“Prices paid” for houses included in the Q2’12 — April through June — Case-Shiller composite were decided upon at “purchase contract” – between Feb and May – not “closing”…prices are not decided on at the close. This dynamic is consistently overlooked by analysts, the media and bloggers, and makes a huge difference, as the CS is so painfully lagging. This 2 to 7 month discrepancy literally means when a number comes out for a particular month or quarter you are actually looking at activity a full one to two “seasons” prior.
As such, Q2’12 Case-Shiller fully benefited from Twist’s 150bps drop in rates in Sept ’11 and the election cycle foreclosure abatement lack of supply positive mix-shift. Moreover, in part, “prices paid” were pushed higher due to the pulled-forward demand on the lack of rain and snowfall essentially bringing forward the kick-off to the peak selling and pricing season by a couple of months. All told, these stimulus related and “transitory” influences should have increased prices paid by 15% to 20% in Q2 QoQ…but they only added 6.9%. Further, on a YoY basis Q2’12 was only up 1.2%, which is absolutely weak relative to the massive increase in direct housing market stimulus YoY. Lastly, you hear me talking all of the time about how the real comp to this year’s housing market is 1h’10 during the home buyer tax credit period. Well, in 2010, the Case-Shiller also surged from Q1 to Q2 by 4.7% — even last year it jumped 4.1% –, thus we have seen this stimulus and non-stimulus driven Q1 to Q2 Case-Shiller prices paid jump movie before.
It is so important to recognize that the “Twist” 150bps — or 30% — plunge in rates created an instant 15% additional purchasing power for the 70% of people who get loans to buy. Because rates fell in September and it took a month to three for people to react, shop, and contract houses, this benefit was not being priced into “prices paid” until January, which again, is part of the Q2 Case-Shiller. Moreover, in Q1’12 foreclosures as a pct of total sales were only down 16% YoY while they were down 25% in Q2’12 YoY, which also provided a meaningful high side QoQ mix-shift “skew” to prices paid.
Bottom line, when you unadjust, normalize, handicap, overlay stimulus periods, and analyze — based on the massive increase in rates driven purchase power, the distressed mix shift positive skew, pulled-forward effect, and the overwhelmingly more positive sentiment — the YoY June CS 10 and 20 only being up 0.1% and 0.5% respectively and the Q1 to Q2’12 being up 6.9% can be viewed as ‘net’ house price depreciation…and should be very disappointing for those looking for “escape velocity” and a “durable recovery”.
All of these underlying fundamentals I constantly harp on and have for years — that go unrecognized all of the time — will eventually come to the surface and rule the roost. In fact, real-time prices paid that I track show strong evidence of having rolled over in July.
Have a great Holiday weekend!