by Bill McBride on 1/27/2015 03:57:00 PM
Tuesday, January 27, 2015
This morning, S&P reported that the National index increased 0.8% in October seasonally adjusted. However, it appears the seasonal adjustment has been distorted by the high level of distressed sales in recent years. Trulia's Jed Kolko wrote in August: "Let’s Improve, Not Ignore, Seasonal Adjustment of Housing Data"
The housing crisis substantially changed the seasonal pattern of housing activity: relative to conventional home sales, which peak in summer, distressed home sales are more evenly spread throughout the year and sell at a discount. As a result, in years when distressed sales constitute a larger share of overall sales, the seasonal swings in home prices get bigger while the seasonal swings in sales volumes get smaller.Kolko proposed a better seasonal adjustment:
Sharply changing seasonal patterns create problems for seasonal adjustment methods, which typically estimate seasonal adjustment factors by averaging several years’ worth of observed seasonal patterns. A sharp but ultimately temporary change in the seasonal pattern for housing activity affects seasonal adjustment factors more gradually and for more years than it should. Despite the recent normalizing of the housing market, seasonal adjustment factors are still based, in part, on patterns observed at the height of the foreclosure crisis, causing home price indices to be over-adjusted in some months and under-adjusted in others.
This graph from Kolko shows the weighted seasonal adjustment (see Kolko's article for a description of his method). Kolko calculates that prices increased 0.6% on a weighted seasonal adjustment basis in November - as opposed to the 0.8% SA increase and 0.1% NSA decrease reported by Case-Shiller.
The "better" SA (green) shows prices are still increasing, but more slowly than the Case-Shiller SA.
The expected slowdown in year-over-year price increases is ongoing. In November 2013, the Comp 20 index was up 13.8% year-over-year (YoY). Now the index is only up 4.3% YoY. This is the smallest YoY increase since October 2012 (the National index was up 10.9% YoY in October 2013, is now up 4.7% - a little more than the YoY change last month).
Looking forward, I expect the YoY increases for the indexes to move more sideways (as opposed to down). Two points: 1) I don't expect the indexes to turn negative YoY (in 2015) , and 2) I think most of the slowdown on a YoY basis is now behind us. This slowdown in price increases was expected by several key analysts, and I think it is good news for housing and the economy.
In the earlier post, I graphed nominal house prices, but it is also important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $277,000 today adjusted for inflation (39%). That is why the second graph below is important - this shows "real" prices (adjusted for inflation).
Another point on real prices: In the Case-Shiller release this morning, the National Index was reported as being 9.1% below the bubble peak. However, in real terms, the National index is still about 23% below the bubble peak.
Nominal House Prices
The first graph shows the monthly Case-Shiller National Index SA, the monthly Case-Shiller Composite 20 SA, and the CoreLogic House Price Indexes (through November) in nominal terms as reported.
In nominal terms, the Case-Shiller National index (SA) is back to April 2005 levels, and the Case-Shiller Composite 20 Index (SA) is back to November 2004 levels, and the CoreLogic index (NSA) is back to February 2005.
Real House Prices
The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.
In real terms, the National index is back to March 2003 levels, the Composite 20 index is back to September 2002, and the CoreLogic index back to March 2003.
In real terms, house prices are back to early '00s levels.
In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.
Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.
This graph shows the price to rent ratio (January 1998 = 1.0).
On a price-to-rent basis, the Case-Shiller National index is back to April 2003 levels, the Composite 20 index is back to October 2002 levels, and the CoreLogic index is back to April 2003.
In real terms, and as a price-to-rent ratio, prices are mostly back to early 2000 levels - and maybe moving a little sideways now.