by Calculated Risk on 11/24/2009 12:10:00 PM

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 Q3 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 1987 = 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 Q3 2009 on a national basis. However this ratio could easily decline another 5% to 10% or so, and with rents now falling, prices could fall even more.

Notice the price-to-rent ratio is currently almost as high as during the late '80s housing bubble.

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 tables, 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 above prices in the '90s and perhaps real prices will decline another 10% or so. Prices can and do increase in real terms - especially in areas with land constraints. Also newer homes are larger than older homes - so the real prices are higher.

Summary

These measures are useful, but somewhat flawed. These measures give a general idea about house prices, but in the short run there are more 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 (because of the loan modification efforts and local moratoria), and demand was very strong in Q3 from the first-time home buyer frenzy and cash flow investors. This has pushed up prices at the low end, and suggests price might fall some again at the low end - although probably not to new lows.

However in the mid-to-high end of the bubble areas - with significant supply and little demand - prices are still too high. And I expect further declines in those areas and probably nationwide (although this isn't as obvious as it was in 2005 since most of the price declines are over).

by Calculated Risk on 11/24/2009 10:42:00 AM

The FDIC released the Q3 Quarterly Banking Profile today. The FDIC listed 552 banks with $345.9 billion in assets as “problem” banks in Q3, up from 416 banks with $299.8 billion in assets in Q2, and 252 and $159.4 billion in assets in Q4 2008.

Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing.

The Unofficial Problem Bank List shows 513 problem banks - and will probably increase this week.

Click on graph for larger image in new window.

This graph shows the number of FDIC insured "problem" banks since 1990.

The 552 problem banks reported at the end of Q3 is the highest since 1993.

The second graph shows the assets of "problem" banks since 1990.

The assets of problem banks are the highest since 1992.

On the Deposit Insurance Fund:

The Deposit Insurance Fund (DIF) decreased by $18.6 billion during the third quarter to a negative $8.2 billion (unaudited) primarily because of $21.7 billion in additional provisions for bank failures. Also, unrealized losses on available-for-sale securities, combined with operating expenses, reduced the fund by $1.1 billion. Accrued assessment income added $3.0 billion to the fund during the quarter, and interest earned, combined with realized gains from sale of securities and surcharges from the Temporary Liquidity Guarantee Program, added $1.2 billion.

Fifty insured institutions with combined assets of $68.8 billion failed during the third quarter of 2009, the largest number since the second quarter of 1990 when 65 insured institutions failed. Ninety-five insured institutions with combined assets of $104.7 billion failed during the first three quarters of 2009, at a currently estimated cost to the DIF of $25.0 billion. The DIF’s reserve ratio was negative 0.16 percent on September 30, 2009, down from 0.22 percent on June 30, 2009, and 0.76 percent one year ago. The September 30, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1992, when the ratio was negative 0.20 percent.

The number of failures is now up to 124.

by Calculated Risk on 11/24/2009 09:56:00 AM

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

This monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). NOTE: This is the Not Seasonally Adjusted data - the link is broken for the SA data.

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 29.9% from the peak, and up about 0.4% in September.

The Composite 20 index is off 29.1% from the peak, and up 0.3% in September.

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

The Composite 10 is off 8.5% from September 2008.

The Composite 20 is off 9.4% from September 2008.

This is still a very significant YoY decline in prices.

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

Prices decreased (SA) in 11 of the 20 Case-Shiller cities in September (NSA).

In Las Vegas, house prices have declined 55.4% from the peak. At the other end of the spectrum, prices in Dallas are only off about 4.7% from the peak - and up in 2009. Prices have declined by double digits from the peak in 18 of the 20 Case-Shiller cities.

I'll have more on prices (compare to stress, price-to-rent) later.

by Calculated Risk on 11/24/2009 09:12:00 AM

Note: I will have graphs as soon as S&P releases the data online.

S&P reports the Composite 10 index increased 0.3% in September, and the Composite 20 index increased 0.3% (both SA). Eleven cities posted increases, nine showed price declines.

From S&P:

“We have seen broad improvement in home prices for most of the past six months,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “However, the gains in the most recent month are more modest than during the seasonally strong summer months. Fewer cities saw month to month improvements in September than in August in both seasonally adjusted and unadjusted figures. Nationally, the U.S. National Composite rose by 3.1% in both the 2nd and 3rd quarters of 2009. Both the 10-City and 20-City Composites posted their fifth consecutive monthly increase with September’s report."

by Calculated Risk on 11/24/2009 08:30:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis.
...
The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

Personal consumption expenditures (PCE) were revised down to 2.9% from 3.4%. And investment in nonresidential structures was revised down to -15.1% from -9.0%.