Henry Blodgett, bless his heart, picked up on a recent research report of mine describing the likely reason that median and average house prices have increased slightly over the past two months in CA and other bubble state MSA’s.
The report that he republished was actually a one page follow-up with one chart to a multi-page report entitled ‘HOUSE PRICES — the next leg down‘ containing several charts that I published a couple of days earlier — before Case-Shiller was released.
This update was taken slightly out of context with respect to CS. It is important to note that my reports were referring to reported median and average house prices – not CS. However, I did refer to CS as noted in the excerpt from the original report below.
Excerpts from original 7-27 report — HOUSE PRICES…the next leg down
Summary (7-27 Report)
Several factors influence reported house sales and price indices. Some are age-old macro and some new-era micro. At the present time, several price indices are showing many MSA’s flattening out or even rising slightly. Is this the ‘housing bottom’ everybody has been calling constantly for two years? Or, just a false bottom caused by factors never before seen, therefore, never analyzed?
In this report, I examine the foreclosure-related resale and organic (the healthy market) markets, and how each group influences the housing market as a whole. The mutually exclusive movement of these two markets of relatively equal size — one of which follows typical seasonality trends and one which doesn’t — can quickly change the total market make-up and reported house prices.
In large part, this large-body push-pull effect accounts for the past few months of increased prices across many MSA’s in CA. It also points to another drop beginning as early as late Fall, as organic seasonality ends and foreclosure-related resales reclaim the mix.
Case-Shiller may Start Acting Very Strange as Well
The CS indices will run into the same seasonal mix-shift as the hard monthly data released by other sources each month. It just may take a little longer to be seen because of the multi-month averaging, lag reporting, and sale scrubbing.
Remember, CS scrubs the sales included in the survey for things such as flipping, renovation etc by eliminating resales that occur within 6-months of each other. But they do include foreclosure resales by lenders because they are arms-length transactions.
The low-end of the market led by foreclosure resales was the CA housing market until recently when organic took over again. Because servicers can easily own REO for longer than 6-months before it resells, CS has likely been capturing much of the foreclosure resale market. Due to the fact foreclosure resales have been outpacing organic sales until recently, the CS in many MSA’s may have been pulled towards the distressed pricing.
But now that the market at the low end — especially foreclosure resales — have picked up dramatically and is turning much faster than it did in the past, CS might throw out more foreclosure resales because they are transacting within the 6-month window. This could really skew their mix to the organic side temporarily while other monthly indices are showing the opposite in the Fall and Winter. Seeing CS rise while everyone else is reporting a drop would be par for the course in this Bazarro universe.
But if this does occur, CS will simply lag. As foreclosure resales once again outpace organic due to the seasonal effects explained in this report, it will roll over a few months after the hard data that we follow.
7-28 (Update 1) HOUSE PRICES — the next leg down
(The report below is the full update to the original report)
Good Morning,
Slight median and average house price appreciation is being seen across some MSA’s mostly in the bubble states – there is no doubt about this. In my ‘House Prices — the next leg down‘ report released earlier this week (attached), I detailed the primary reason for this happening and why it should turn around in the Fall/Winter. In the original report, there are eight charts but I think the simple line chart I added below best highlights the temporary organic/foreclosure-related seasonal mix-shift responsible for the price movement.
The chart below shows clearly the organic sales seasonality (pink) in 2008 and 2009. But in 2008, foreclosure-related resales were surging relative to organic sales each month. And in 2009 they have remained relatively flat all year. The leveling out of foreclosure-related resales has made organic sales going up and down the deciding price factor. This year, as more organic sales (including more jumbo homes going off this year due to price dumping) relative to foreclosure-related resales happened during the peak season, the median and average prices moved in lock-step towards the higher organic market price.
But the season ends now. Every year, organic sales fall off of a cliff beginning in August primarily because kids go back to school in Sept. If organic sales follow typical seasonality trends lower again this year and foreclosure-related resales stay the same or rise (no reason they shouldn’t), then the average and median prices will be pulled quickly back towards the distressed market price. Never before in the history of the housing market have we had two market pulling and pushing on each other like this.
You hear all of the time — ‘”house prices turning is like turning a freighter therefore, this tick up is a definitive leading indicator”. That is just not the case in the new-era housing market. The bullet points below correspond to points in the chart below.
1. Previous to 2007, organic sales were the housing market. Foreclosure-resales made up 5% at most.
2. Prices were at a peak through mid 2007.
3. Foreclosure resales (sold through a Realtor channel) began infesting the mix – organic sales and median prices began to drop sharply.
4. Foreclosure resales keep rising for over a year while and prices continued to fall as the median price was pulled towards the foreclosure-related resale market price. In Sept they overtake organic sales. By Nov 2008, foreclosure resales peaked due to maximum demand from investors and first timers and foreclosure moratoriums etc.
5. In Jan 2009, after a 55% house price drop, median prices level out as the early purchase season begins and organic sales begin to increase. Additionally, foreclosure-related resale inventory has been held artificially low due to moratoriums and/or servicers keeping inventory off the market on purpose. In April 2009, CA median house prices bottom.
6. Going into the busy season, organic sales bounce hard (just like they did the year prior), hit an inflection point in May and reclaim the mix in June.
7. Median house prices began to turn upward in May — moving toward the organic market price — shortly after organic sales began to reclaim the mix. (See pink line leading yellow line beginning at ’6′.
Over the next few weeks we will be putting together more foreclosure data driven reports for clients like the ones in the 3/18 ‘housing bottom‘ report resent yesterday that will do even a better job getting ahead of the monthly house price movement. Mark Hanson
