8-29 More on the “Weak” July Case Shiller

by Mark on August 29, 2012


  • 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!

{ 12 comments… read them below or add one }

Takua August 29, 2012 at 1:56 pm

and should be very disappointing for those looking for “escape velocity” and a “durable recovery”.

Mark – How about those that are just looking for a bottom as in “I just want to pay 200K for my house without fear it is going to come crashing down” (nominally)??? No offense, but there is an underlying sense of doom and foreboding in everything you post. All of which was (IMO) justified when prices were crashing 2006-2009, but no longer justified when prices flatlined (2009-2012).

For example, you now say that you have evidence that things have “rolled over in July”. Sounds dramatic, but what does it mean? Does that mean for the guy who paid 200K for the house, its “rolling over” to 180K or some other god awful drop such that he should wait? Or is it “rolling over” in the sense that the house he paid 200K for will be worth 200K 2 years from now (in which case he shouldnt give a sh*t)???


knuckle August 29, 2012 at 6:17 pm

Your starting to babble a little, Yeah prices should be higher based on lower interest rates, MAYBE in a perfect world. The real test will be will price “plunge” if interest rates start to creep up or will they remain stable and gradually increase. The doom and Gloom days are over for the most part. Yeah, there are a lot of people upside down on there mortgage, yet they still buy iphones and cable TV.

Government bail outs need to stop and let the chips fall where they fall. Quit giving welfare and create jobs is the cure. Everything else will heal itself in time.


Mark August 29, 2012 at 7:53 pm

i agree the doom and gloom days are over but I see no reason housing couldn’t take 10 to 12 more years to really find a durable bottom losing another 2 to 3% on avg per year (some years up 5%, some down 10% etc).


Gordon August 30, 2012 at 1:36 am

I have never read a more succinct analysis about any real estate period/cycle than this post. The numbers are as stark as can be. Kudos and many thanks Mark.


Advisor August 30, 2012 at 4:45 am

Cratering housing prices resulting in dramatically more affordable shelter costs is “doom and gloom”?? Seriously? Nonsense. Dramatically lower shelter costs is BULLISH OPTIMISM.

After if you think prices are low(they’re not), you’re going to be stunned over the coming years and decades.


Russ Wetherill September 4, 2012 at 3:01 pm

I totally agree that Case Shiller is yesterday’s news, but it remains the best indicator of where the market was yesterday (or 5 months ago). June’s CS numbers are really May’s closing sale prices with April and June thrown in for good measure. May’s closing prices are March’s negotiated contract prices. What I think is missing from the main-stream analysis is the effect of the rolling nature of the index. For instance, when you compare May’s CS number to June’s, you aren’t really comparing May to June, you are comparing June to March closed sales prices (since May and April are the same in each data set). Looking at the Los Angeles data for the last 26 years, May and June MOM price changes are generally close with June being greater than May. The last three years we have seen May MOM prices rise much more than June (2010: 1.68/.57; 2011: .52/.35; 2012: 2.21/1.70). The only other time we have seen this inversion for three consecutive years was 2005/6/7. To me, this means that the spring selling season is starting early and ending early. This drop in closed sales prices in June tends to keep prices from rising through the season and building momentum for the next year. Much of this drop off can be attributed to the Tax Credit in 2010 (expired 4/30/10), FHA MIP increase in 2012 (4/1/12), as well as pulling forward sales from 2011 into 2010.

Absent any more market manipulation to raise demand or restrict supply, I would expect that the second derivative of the YOY price change would be negative next year with falling prices the following year. Instead, I expect the FED to drive rates lower (sub 3%), the banks to increase their foreclosure sales and short sales to roll over their bad loans and recover more of their capital while the rates are low. Under this scenario prices will rise about 5-10% this next year with affordability about the same. Sales volumes will remain close to historical lows.


rj chicago September 6, 2012 at 9:32 am

There is an interesting post on Calculated Risk today (Sept 6) about the number of homes now being rented relative to 2006 – the metrics on the available supply down the road as prices improve using good ol’ supply and demand seem to support exactly what Mr. Hanson is arguing in these blog pages. Demand remains stale at best and supply has been reduced due to rent demand – so…..the metric would tell me that over time as the rentals go back to the for sale market and increase supply with demand constant or continuing to trend down (read jobs, jobs, jobs) prices have to continue to drop. Just my two cents worth.


Tom Lawler November 2, 2012 at 4:11 pm

Every competent housing analyst looks at NSA data. what a silly psst.


Tom Lawler November 12, 2012 at 5:21 pm

I hope you saw the not seasonally adjusted sales data from SAR. Wow.


Mark November 12, 2012 at 5:37 pm

Yes, Oct — although it had a ton of closing days relative to Sept and Yoy — was a decent month no doubt. In fact, my favorite homebuilders are in thoroughly in correction mode. I am hoping the names I like will get closer to the 200 around the time Oct Existing and New Home Sales come out for a quick trade on the data. Hope to scalp 10% upside then fade them into year end tax selling.


Tom Lawler November 12, 2012 at 5:25 pm

give me a break/ I assume you have anayzed the October results; what competent analyst has not? None.


Advisor November 12, 2012 at 8:41 pm

Tom Lawler…. you used house pimps are pathetic.


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