by Calculated Risk on 8/25/2009 04:05:00 PM

Imagine a headline in June 1991 (if Case-Shiller was around):

"House Prices increase at 11.6% annualized rate in June!"

The horrible price declines were over ... right? Nope. Real house prices declined for almost another 5 years. Just something to remember.

From Bloomberg: NYC Apartment Rents Fall as Tenants Gain Leverage

In buildings attended by doormen, rents on one-bedroom apartments dropped 10 percent from a year earlier to an average of $3,274 a month, according to a report by the Real Estate Group of New York. Studio prices fell 7 percent at those properties to $2,329 and two-bedrooms declined almost 6.9 percent to $5,161.

Falling rents means a further decline in house prices to lower the price-to-rent ratio.


And a market graph from Doug Short. This matches up the market bottoms for four crashes (with an interim bottom for the Great Depression).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 8/25/2009 02:25:00 PM

This following graph compares the Case-Shiller Composite 10 SA index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index, June: 152.55

Stress Test Baseline Scenario, June: 148.82

Stress Test More Adverse Scenario, June: 140.71

Unlike with the unemployment rate (worse than both scenarios), house prices are performing better (from the perspective of the banks) than the the stress test scenarios. I believe there will be further price declines later this year, because I think the Case-Shiller seasonal adjustment is insufficient, and because I expect the first-time home buyer frenzy to slow just as more distressed supply comes on the market - even if an extension to the tax credit is passed.

by Calculated Risk on 8/25/2009 11:30:00 AM

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty six states are showing declining three month activity.

This is what a widespread recession looks like based on the Philly Fed states indexes.

On a one month basis, activity decreased in 35 states in June, and was unchanged in 8 states. Here is the Philadelphia Fed state coincident index release for July.

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for July 2009. In the past month, the indexes increased in seven states (Louisiana, Mississippi, North Dakota, South Carolina, South Dakota, Vermont, and Wisconsin), decreased in 35, and remained unchanged in eight (Hawaii, Indiana, Nebraska, New Jersey, Oklahoma, Rhode Island, Tennessee, and Virginia) for a one-month diffusion index of -56. Over the past three months, the indexes increased in three states (Mississippi, North Dakota, and Vermont), decreased in 46, and remained unchanged in one (South Carolina) for a three-month diffusion index of -86.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Most of the U.S. was has been in recession since December 2007 based on this indicator.

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

A large percentage of states showed declining activity in July. Still a widespread recession in July by this indicator ...

by Calculated Risk on 8/25/2009 10:01:00 AM

Here are three key measures of house prices: Price-to-Rent, Price-to-Income and real prices based on the Case-Shiller quarterly national home price index.

Price-to-Rent

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 through Q2 2009 using the Case-Shiller National Home Price Index (SA):

Click on image for larger graph in new window.

This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is mostly behind us as of Q2 2009 on a national basis. However this ratio could easily decline another 10% or so.

It is important to note that rents are now falling and this has not shown up in the OER measure yet. The OER lags REIT rents, and I expect OER to declines later this year. And declining rents will impact the price-to-rent ratio.

Price-to-Income:

The second graph shows the price-to-income ratio:

This graph is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008 and flat for 2009).

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.

Real Prices

This graph shows the real and nominal house prices based on the Case-Shiller national index. (Q1 2000 = 100 for nominal index)

Nominal prices are adjusted using CPI less Shelter.

The Case-Shiller real prices are still significantly above prices in the '90s and perhaps real prices will decline another 10% to 20%.

Summary

These measures are useful, but somewhat flawed. These measures give a general idea about house prices, but there are other important factors like inventory levels and credit issues. All of this data is on a national basis and it would be better to use local area price-to-rent, price-to-income and real prices.

It appears that house prices - in general - are still too high. However prices depend on the local supply and demand factors. In many lower priced bubble areas supply has declined sharply (as banks are currently slow to foreclose), and demand is very strong (first-time home buyer frenzy, and cash flow investors). This is pushing up low end prices.

However in the mid-to-high end of the bubble areas - with significant supply and little demand - prices are probably still too high.

by Calculated Risk on 8/25/2009 09:00:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for June this morning.

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). This is the Seasonally Adjusted data - others report the NSA data. Note: I have more on the quarterly national index soon.

Click on graph for larger image in new window.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 32.6% from the peak, and up about 9% (annualized) in June.

The Composite 20 index is off 31.4% from the peak, and up in June.


The second graph shows the Year over year change in both indices.

The Composite 10 is off 15.1% over the last year.

The Composite 20 is off 15.4% over the last year.

This is still a very strong YoY decline.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

NOTE: updated 3rd graph. Two cities have price increases for 2009, and hopefully this graph shows the change better.

Prices increased (SA NSA) in 15 of the 20 Case-Shiller cities in June. In Las Vegas, house prices have declined 54.6% from the peak. At the other end of the spectrum, prices in Dallas are only off about 5.6% from the peak - and up in 2009. Prices have declined by double digits almost everywhere.

Let the debate begin - seasonal issues of mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, etc. - but this does show a price increase in June.

I'll compare house prices to the stress test scenarios soon.