Posts Tagged ‘negative feedback loop’

Woohoo! The April S&P/Case-Shiller Home Price Indices showed a monthly increase* in home prices for the first time in eight months today.

On a month-over-month basis, the 10- and 20-City Composites were up 0.8% and 0.7% in April versus March. The chart below illustrates the annualized returns of the 10-City and the 20-City Composite Home Price Indices.  In April 2011, the 10-City and 20-City Composites recorded annual declines of -3.1% and -4.0%, respectively.

Oh wait a minute, there is an asterisk* to address before we can get excited about positive news in housing.

“In a welcome shift from recent months, this month is better than last - April’s numbers beat March,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “However, the seasonally adjusted numbers show that much of the improvement reflects the beginning of the Spring-Summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather."

Ugh. Mr. Blitzer is a bucket of cold water (rightfully so).  Why does distinguishing between seasonally adjusted and non-seasonally adjusted data matter? Because Case-Shiller recommends using non-seasonally adjusted data, citing it as the more reliable indicator.  This is the last guidance S&P shared on the topic:

"Economic data which are affected by the time of the year, or the seasons, are often adjusted to remove these effects to make it easier to identify underlying changes in the economy. Seasonal adjustment increases the unadjusted values in weak months and decreases the unadjusted values in strong months to eliminate regular seasonal patterns while leaving the underlying trend unaffected. For the S&P/Case-Shiller Home Price Indices, S&P reports two data sets – before seasonal adjustment and seasonally-adjusted. In some recent reports the two series have given conflicting signals, with the seasonally-adjusted series rising month-over-month and the unadjusted series declining. After reviewing the data, the S&P/Case-Shiller Home Price Index Committee believes that, for the present, the unadjusted series is a more reliable indicator and, thus, reports should focus on the year-over-year changes where seasonal shifts are not a factor. Additionally, if monthly changes are considered, the unadjusted series should be used."

Plain and Simple:    The headline many news editors will write, "Home Prices See First Increase in Eight Months",  is based off the monthly, non-seasonally adjusted data. That seems like a glimmer of good news for housing, especially after one remembers that S&P told us to focus on the non-seasonally adjusted data, but Mr. Blitzer wants us to contain our excitement until a new trend develops that confirms a home price stabilization. We need to see progress on a monthly basis and we need it to show up in annual comparisons as well. This is because seasonal adjustments tend to decrease unadjusted values in strong months to eliminate regular seasonal patterns, such as nice weather. So what Mr. Blitzer is basically telling us is, "This is a step in the right direction but we don't know if it's gonna last. More positive data is needed to confirm a potential stabilization".

A summary of the monthly changes using the seasonally adjusted (SA) and non-seasonally adjusted (NSA) data can be found in the table below.  Looking closer,  one can see why Mr.Blitzer is skeptical of the month-over-month improvement. In both the 10- and 20- city indexes, there is a 0.8% difference between non-seasonally adjusted data and seasonally adjusted data.  In only 5 metro areas did the seasonally adjusted figure outperform the non-seasonally adjusted figure.  This makes it clear that seasonal adjustments do tend to decrease the unadjusted index values in strong months.

Of course we're discussing the Composite Indexes when we should be breaking down the data by individual locations. 

Excerpts taken from the release..

• As of April 2011, 19 of the 20 MSAs and both Composites are down compared to April 2010.
• From their 2006/2007 peaks, six of the 20 MSAs showed new index lows in April:  Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa.
• Thirteen of the markets rose in April over March, with six of them increasing by more than 1.0%.
• While 13 markets rose on a monthly basis, 16 markets saw their annual rates of change fall deeper into negative territory.
• Minneapolis was the only city that demonstrated a double-digit annual decline, -11.1%.
• Washington D.C. continues to be the only market to post a year-over-year gain, at +4.0%. Plus D.C. saw a +3.0% monthly increase
• With respective index levels of 100.36 and 101.95, Phoenix and Atlanta are two markets that are close to losing any value gained since January 2000.
  
• As of April 2011, Cleveland, Detroit and Las Vegas are the three markets where average home prices are lower than where they were 11 years ago.

The table below summarizes the results for April 2011...

Mr. Blitzer summed up the findings of the report nicely when he said, "For a real recovery we would need to see several months of increasing home prices, large enough to shift the annual momentum to the positive side. In short, better news, but still a lot of questions and a long way to go.”

That leaves us to ponder over the million dollar question: Have home prices finally hit bottom?

Nationally, housing faces a long road to recovery, but not all markets are equal. While areas with a high concentration of distressed properties are clearly stuck in a deflating environment, some communities will see price stability.  It's all based on local and regional economies. Where are jobs being created? Where are the best schools? Where is value being created by the community? Where do buyers want to live? This is where the housing recovery can build momentum. Of course you need to be in the right financial situation to even be asking these questions. That's another problem all together. Tight credit demands from lenders combined with damaged borrower credit profiles (and a lack of reserves) implies buyer demand will lag the broader economic recovery, which is lagging itself.  Finding a bottom in the hardest hit areas is another story. Here, the GSEs, FHA, and major banks must manage their REO inventory carefully. In these areas, home prices remain highly-sensitive to even the smallest of shocks in buyer sentiment, such as the premature release of shadow inventory. It's gonna be a tight-rope walk. Step 1 is stopping the negative feedback loop.

ABOUT: The indices, which are billed by S&P as the leading measure of U.S. home prices, are constructed to track the price path of typical single-family homes in a number of metropolitan statistical areas (MSAs).  The study uses matched price pairs of individual houses to construct a 20-City Composite Index and a 10-City Composite Index which are updated monthly. The indices have a base value of 100 which was set in January 2000.  Thus a current index value of 150 indicates there has been a 50% appreciation since that date for a typical home in the subject market. To be eligible to be included in the home price indices, a house must be a single-family dwelling. Condominiums and co-ops are specifically excluded. S&P Indices does publish some separate, supplemental indices for condominiums. Houses included in the indices must also have two or more recorded arms-length sale transactions. New construction is excluded.

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The National Association of Realtors today released Existing Home Sales data for May 2011.

Existing Home Sales declined by 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a negatively revised 5.00 million pace in April. This is 15.3 percent below the 5.68 million annual pace reported last May (*when sales were surging to beat the deadline for the home buyer tax credit).   All regions saw annual contractions in both the pace of home sales and median prices.  And while total housing inventory was reduced by 1.0 percent to 3.72 million previously owned homes for sale,  it's now going to take longer to sell those homes because the annualized pace of sales declined to 4.81 million. That works out to 9.3-months of supply, up from 9.0-months of supply in April. FYI: Supply of between six and seven months is viewed as an equilibrium range. Higher readings general point to lower home prices to better balance supply and demand.

Existing-home sales were down in May as temporary factors and financing problems weighed on the market, according to the National Association of Realtors®. Lawrence Yun, NAR chief economist, said temporary factors held back the market in May, as implied from prior data on contract signings. "Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May," he said. "Current housing market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are likely to mitigate the impact going forward. The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year."

Excerpts from the Release...

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3 percent below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit.

Single-family home sales declined 3.2 percent to a seasonally adjusted annual rate of 4.24 million in May from 4.38 million in April, and are 15.4 percent below a surge to 5.01 million one year ago. The median existing single-family home price was $166,700 in May, down 4.5 percent from May 2010.

Existing condominium and co-op sales fell 8.1 percent to a seasonally adjusted annual rate of 570,000 in May from 620,000 in April, and are 14.7 percent below the 668,000-unit pace in May 2010. The median existing condo price was $165,400 in May, which is 5.8 percent below a year ago.

There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Yun explained.

Regionally, existing-home sales in the Northeast declined 2.5 percent to an annual level of 770,000 in May and are 13.5 percent below May 2010. The median price in the Northeast was $241,500, up 6.1 percent from a year ago.  Existing-home sales in the Midwest dropped 6.4 percent in May to a pace of 1.02 million and are 22.7 percent below a year ago. The median price in the Midwest was $136,400, which is 8.5 percent below May 2010. In the South, existing-home sales fell 5.1 percent to an annual level of 1.85 million in May and are 14.4 percent below May 2010. The median price in the South was $149,200, down 3.1 percent from a year ago.
Existing-home sales in the West were unchanged at an annual pace of 1.17 million in May but are 10.0 percent lower than a year ago. The median price in the West was $192,300, which is 12.6 percent below May 2010.

“Home prices are rising or very stable in local markets with improved employment conditions, such as in North Dakota, Alaska, Washington, D.C., and many parts of Texas,” Yun noted.

The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. Distressed homes – typically sold at a discount of about 20 percent – accounted for 31 percent of sales in May, down from 37 percent in April; they were 31 percent in May 2010.

“The price decline could be diminishing, as buyers recognize great bargain prices and the highest affordability conditions in 40 years; this will help mitigate further price drops,” Yun said.

All-cash transactions stood at 30 percent in May, down from 31 percent in April; they were 25 percent in May 2010; investors account for the bulk of cash purchases.

First-time buyers purchased 35 percent of homes in May, down from 36 percent in April; they were 46 percent in May 2010 when the tax credit was in place. Investors accounted for 19 percent of purchase activity in May compared with 20 percent in April; they were 14 percent in May 2010.

Total housing inventory at the end of May fell 1.0 percent to 3.72 million existing homes available for sale, which represents a 9.3-month supply at the current sales pace, up from a 9.0-month supply in April.

Yun said the market also is being constrained by the lending community. “Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards,” he said. “There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction – this overreaction is clearly holding back the recovery.”

When calling attention to high gas prices and severe weather Yun is referencing the economic connection between Consumer Confidence and housing demand. We have described this relationship as the "negative feedback loop". This is what we wrote in August 2010 after the home buyer tax credit expired in June....

HOUSING  IS STAGNANT

This should come as no surprise to folks working in the industry. Uncertainty is abundant in all sectors of the economy and prospective (qualified) homeowners are too worried about further declines in home prices to buy a house right now. When investing outlooks are unusually cloudy and the market's strategic perspective is stuck in the "here and now", a brutal negative feedback loop can arise. Some may refer  to this phenomenon as a "downward spiral", where negative data leads to more negative data.

Plain and Simple: Although mortgage rates are at all-time lows and home affordability is at an all-time high, fence sitting home buyers are waiting for proof that home prices have hit bottom before making the biggest investment decision of their life.  While they wait for a clear cut buy signal, home prices will fall further and home buyer pessimism will intensify which will lead to more weak housing data. And the downward spiral begins...

We could go on and on about the industry, lender, and borrower specific problems limiting the housing recovery, however we believe the general big picture economic environment is providing enough roadblocks to recovery on its own. Thus, we will continue to state that until the labor market stabilizes and jobs start being created, the housing market will undergo a slow, frustrating recovery process (for mortgage and real estate professionals especially)

Some Optimism: Nationally, housing faces a long road to recovery, but not all markets are equal. While areas with a high concentration of distressed properties are clearly stuck in a deflating scenario, some communities will see price stability.  It's all based on local and regional economies. Where are jobs being created? Where are the best schools? Where is value being created by the community? Where do buyers want to live? This is where the housing recovery can find momentum. Of course you need to be in the right financial situation to even be asking these questions. That's another problem all together...

NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. “We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum downpayment requirements to 20 percent,” he said. “We don’t need to throw the baby out with the bath water – increasing downpayment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”

ABOUT: Existing Home Sales report on the number of completed real estate sales transactions on single-family homes, townhomes, condominiums and co-ops. The methodology in calculating existing-home sales statistics is really quite simple. Each month the National Association of Realtor® receives data on existing-home sales from local associations/boards and multiple listing services (MLS) nationwide.  The monthly EHS economic indicator is based on a representative sample of 160 Boards/MLSs. NAR captures 30-40% of all existing-home sale transactions with its monthly survey. HERE is the methodology for the data collection

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It looks increasingly more likely that the country may experience the dreaded "double-dip" in housing prices according to the S&P/Case-Shiller Home Price Indices released today. The indices reflect data through November and show a deceleration in the annual growth of home prices nationally and in 17 of the 20 metropolitan statistical areas (MSAs) that create its indices. S&P/Case-Shiller analyzes its national sample of 20 MSAs individually and uses them to construct a 10- and a 20-City Composite Index. Both indices fell in November from October levels by 0.4 percent and 1.6 percent respectively and prices fell in 19 of the MSAs; only San Diego eked out a negligible 0.1 percent gain. The report states that "since May 2010, the housing market has experienced an unambiguous deceleration...(read more)