March House Price Update

Yesterday was the last Tuesday of the month, so it’s time for our monthly update from the good folks at S&P who bring us the only home price index worth watching, the Standard & Poor’s/Case Shiller Index. This time ‘round the media coverage of the event was light, which I suppose I could spin as a good sign. Perhaps things are looking up and we are just not that worried about home prices any more.

But readers of this blog know I am a glass-half-empty kinda guy. My view is that the media doesn’t consider the release of some data on house prices to be all that interesting, however important it might be. Also, the release coincided with the release of some surprisingly strong consumer confidence numbers and a few other stories of the trivial type that the media likes to report on, like a Supreme Court nominee and some North Korean missile tests.

House prices are down. That’s not exactly news. The Case Shiller 20 City Composite was down 2.2% in March from February, 18.7% from the previous March, and 32.2% from the July 2006 peak.

Numbers like these are hard to interpret outside of context and perspective. Here is a chart of the 10 City Composite index corrected for inflation since 1987. (The 20 City Composite only goes back to 2000.)

I feel conflicted when talking about something like this. On the one hand, I have a natural inclination to pessimism which makes me want to point out what a sharp downward slope we are on.

But I have an even stronger inclination to be contrarian. On those rare occasions when everybody else is a pessimist I find myself, somewhat uncomfortably, an optimist. And everybody seems to be a pessimist now. Even David Blitzer, chairman of S&P’s index committee, was quoted in the press release as saying that “we see no evidence that that a recovery in home prices has begun.”

If your definition of a recovery beginning is that prices go up, then no, there is no evidence of a recovery yet. But look closely and there are some hopeful signs. Three of the cities in the 20 City Composite (Denver, Charlotte, and Dallas) did not go down in March. Yes, 17 of them did have house price declines, but the last time it wasn’t unanimously down was August 2008.

Further, that chart above shows the current real price level nearing the 1989 peak, suggesting that prices may be soon be in a range that might be called long-run plausible.

And it is important to understand how stale this data is by the time we get it. Yesterday’s release was of prices for houses sold in March. Except that it’s not just March. Mentioned on the S&P website but not in their press releases, or, unsurprisingly, in media reports, is the fact that what they give out is actually a three month moving average, meaning that the “March” number is really the “January to March” number. Further, what is meant by houses sold in March is houses whose sales closed in March. In general, they went under contract, with deposits made and a price set, a month or two previously.

So yesterday’s not entirely depressing data on house prices represents transactions agreed to during the period November ‘08 to February ‘09. Those were some grim months. That there is just a glimmer of hope in the numbers, and there is, is something even I can be encouraged about.

Economics, Housing, Robert Shiller | Frank Curmudgeon | May 27, 2009 8:00 am

No Comments

By Dave C., May 27, 2009 @ 9:23 am

I’d like to jump in and buy a house right now, but considering the job market, there is a renting factor your previous post is-owning-or-renting-best didn’t cover. If the crap hits the fan and I lose my job, I can move into a cheaper apartment when my lease is up, potentially slashing my bills in half. So, it looks like I will be renting for some time to come. :/
By Jon @capitalistmaven.com, May 27, 2009 @ 9:36 am

Would you consider the 100 line on this chart to be the “long-run plausible” line? If so, it would seem we’ve still got a ways to go, especially if the undershoot is anything comparable to the preceding overshoot. For example in 97 the undershoot reached was nearly comparable to the overshoot in 89. It really is a shame the chart doesn’t go back any further to see other examples of the “bumps” around the long term trendline.
By Frank Curmudgeon, May 27, 2009 @ 10:14 am

Jon: 100 is just the value as of the start date of the index. It has no particular significance. I also don’t have a fully developed opinion about what the “correct” price for houses might be, but something in the 80 to 120 range on this chart seems defensible. To see the chart going back a nice long time, check out my post on long-run house prices.
By Dave C., May 27, 2009 @ 12:07 pm

Looking are the long-run chart really brings the previous years of insanely high house prices into focus – and so apparently most of our GDP growth during that period was facilitated by home equity withdrawals?
By Helen, May 27, 2009 @ 12:33 pm

While the others are heading for the hills, it seems like a good time to buy the properties they left behind. However, I wish it was easier to buy investment real estate in little bits — I wish I could own 1/10th of 10 properties in my neighborhood, instead of having to become landlord of one.

I know there are REIT’s, but they invest primarily in commercial real estate, which is a completely different segment (to my mind). I wish there was an investment vehicle where 50 families in a community could mutually own 50 homes. Keeping it local would benefit the community — both the investors and the renters.
By Mike, May 28, 2009 @ 7:20 am

“I wish there was an investment vehicle where 50 families in a community could mutually own 50 homes.”

There is.. it’s called a CDO.

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