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What is the Real Housing Decline?

Fri, Aug 29 2008, 05:51 GMT
by Comstock Partners Team

Comstock Partners Inc.

We usually try not to depress our readers over the holidays, and before we forget-have a Happy and Safe Labor Day weekend. However, just as we did on July 3rd when we made a few predictions for the coming year, we have a topic that is too compelling for us to wait another week.

As most of you know we are extremely concerned about the housing market and the effect it will continue to have on the stock market. The figures on housing that were released this week can be taken either positively or negatively depending upon which data you believe is more accurate. There are more than 3 different indices that measure housing prices as well as other data such as foreclosures, inventories, and sales, but the three most popular are OFHEO, NAR, and Case-Shiller. Since OFHEO oversees FNM and FRE and therefore does not measure home statistics on sub-prime and jumbo mortgages, we will concentrate on NAR (National Association of Realtors) and Case-Shiller.

Earlier this week NAR released their numbers on home sales, inventory, and median prices of homes nationwide. We were surprised that many market gurus looked at the sales numbers (increase of 4.6%) as a real positive number for the stock market and could indicate a bottom in the housing market. The fact that foreclosures and forced sales made up about 40% of the sales, and inventories of homes rose to a record 4,670,000 were overlooked by many. We believe these statistics are much more important than the numbers that were driven by forced sales. Also, the number of inventories seems to take a back seat to the number of months' supply of homes (record 11.2 months), also a record. But why focus on a statistic that is based upon forced sales. If sales contract again, as we suspect, the months' supply of inventory to sales will surge, but the only statistic that counts is how many houses are up for sale.

In our opinion, the most important number of the release by the NAR was the median price of homes of $212,400 which is down 7.1% from one year ago. The very next day the Case-Shiller measure of home values showed that their housing price index fell -15.4% for the second quarter vs. a year ago.
We are always surprised that when these numbers are released there is no mention as to how far housing prices have fallen from the peak of the housing market in mid 2006. Isn't it important to know how much money has been lost from the housing market peak?

If you look closely at the numbers you will be able to take a positive view of the NAR release and a more negative view of the Case-Shiller release. This is because the NAR median price of $212,400 is down only -6.4% from the peak of about $227,000 in mid 2006 and up from $196,000 at the February 2008 bottom. Keep in mind that the housing decline in the late 1980s and early 1990s was only about 8%, so this release has to be encouraging. You do have to remember that the NAR is somewhat biased since they would love to see the housing market bottom as early as possible. Another problem with their statistics is that they reflect the mix of homes sold in a given month as well as the change in prices. Therefore, when the mix of homes sold is relatively higher priced, it would tilt the median price upwards and vice-versa.

Now let's turn to the Case-Shiller index which measures the same homes in 10 metropolitan areas from 1987 and 20 metropolitan areas since 2000
(http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_082653.xls). This index should show no bias since it seems that Case is much less bearish on the housing market than Shiller. The smaller sample could be looked upon as a negative, but when you have a sample of 10 metropolitan areas and another sample of 20 metropolitan areas and they show similar results, it has to give you confidence in their statistics. These two indices show the housing market peaking in mid 2006 with consistent declines almost every month to June of 2008 (latest release). The decline in the 10 metropolitan areas since mid 2006 of 226.0 to 180.38 has been just over -20% and the decline in the 20 metropolitan areas was -18.6% (206.0 to 167.69). If you are leaning towards the glass half empty with the Case-Shiller data as we are (or we may look at the glass as being completely empty) you would probably be more concerned about a continuation of the housing market decline and subsequent stock market decline.

The reason we are so concerned about the housing market decline is due to the tremendous wealth effect housing has on the average individual's net worth. The average individual's house is 43% of their total net worth. Remember, the total value of housing was close to $21 trillion at the peak in 2006 and now, depending upon the measurement used, has declined anywhere from $1.3 trillion (NAR down 6.4%) and around $4 trillion (Case-Shiller average between 10 & 20 metropolitan areas). This isn't the end of the story-you have to keep in mind that housing is the asset behind the $5 trillion that the GSEs control and the total $12 trillion in mortgages held by many financial institutions both here and abroad. Also, the amount of money that will be lost before the housing prices decline to normal levels (under 3 times median household incomes) will double the $4 trillion already lost!

Published on  Fri, Aug 29 2008, 06:35 GMT