House prices still climbing

The Office of Federal Housing Enterprise Oversight (OFHEO) today released its house price indexes for 2006:Q2, which continue to show house prices climbing in all but five states, though with a significantly slower rate of increase than previously.




One-quarter logarithmic percent change in average house price between 2006:Q1 and 2006:Q2. Data source: OFHEO
Sep_06_1qtr_house.gif



During the second quarter, statewide average prices started to fall in five states in the Midwest and New England. Even so, half the states saw better than a 1.6% (logarithmic) increase in prices during the second quarter, and a dozen states experienced second-quarter price appreciation that would exceed 10% if maintained for a year. Looking at the year-to-year price change, as of 2006:Q2 prices were still up in every state, up 9% on average and up over 20% in still-hot Arizona.



One-year logarithmic percent change in average house price between 2005:Q2 and 2006:Q2. Data source: OFHEO
Sep_06_4qtr_house.gif



Prices are usually a lagging indicator of housing market conditions, coming down only after home sales decline and inventories rise. With the latter two trends already clearly established, I might have expected to see more outright price declines by this point rather than simply a moderation of the rate of increase.

I continue to watch this with concern, because the magnitude of the previous run-up in real estate prices suggests that the size of ultimate price declines could be quite dramatic as well. If one takes a market fundamentals view of the last five years, the earlier price appreciation would be attributed to falling interest rates, growing population and income, and restricted housing supply. The first factor is presumably the most important, and, if population and income were constant, would suggest that now that interest rates have come back up, the previous increases in house prices would be expected to be reversed. The reality is not quite so stark, since continuing growth in population and income can also provide for some of the adjustment. Even so, I would not discount the possibility of significant downward price movements.

And what then would become of the billions in interest-only, no-down-payment loans currently outstanding, and the home equity loans that have financed much ongoing consumption spending? Ah, that’s the question of the hour, isn’t it?


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10 thoughts on “House prices still climbing

  1. Barry Ritholtz

    The usually demure Office of Federal Housing Enterprise Oversight notes in today’s Q2 release “OFHEO House Price Index Shows Largest Deceleration in Three Decades.”
    That’s a rather blunt assessment.
    The OFHEO director was quoted as saying “These data are a strong indication that the housing market is cooling in a very significant way.”
    Again, nothing subtle there.
    Consider this release only covers Q2 (up to June 30). We’ve have 2 more months of “Price Decelleration” since then.
    Although year over year prices were up over 10% in Q2, sequentially, they were barely up 1%. So if you want to extrapolate, then you are lookingat 4% — assuming there’s no further decelleratation.
    Talk to any real estate agent you know personally — especially on either coast — and they will give you the straight dope as to traffic, sales and price reductions.
    Prices are not remotely holding up — despite 5 consecutive weeks of falling rates.
    However, the way the data is assembled can give the appearance of such. We discussed this a few weeks ago: Why Don’t Big Housing Sales Drop Produce Big Price Drops?
    http://bigpicture.typepad.com/comments/2006/08/why_dont_big_ho.html

  2. Joseph

    Saint Greenspan deserves a special place in hell for his advice to millions of homeowners that they would be better off with adjustable rate loans in 2004 when interest rates were at their lowest in half a century.
    The only thing keeping the economy going after the internet bubble popped was consumer spending financed by the real estate bubble. As interest rates when down, homeowners repeatedly refinanced, each time cashing out their equity for consumer spending. As Greenspan came to the end of his term he saw that the cards were about to come tumbling down. With fixed rates at the bottom, the only way to get one more round of refinancing and consumer spending was to encourage swapping fixed mortgages for ARMs. By the time the consequences were felt, Greenspan would be comfortably in retirement and it would all be Bernanke’s problem.

  3. Stuart Staniford

    Business Week quotes the eye-popping statistic that “Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings.” (The minimum payment is less than the interest on the loan, so the balance grows).
    Here in San Francisco, prices declined year over year in July by 0.6% before inflation (ie they declined by several percent in real terms, depending on ones favorite inflation measure).

  4. srinivas

    The OFHEO price index is hopelessly unrepresentative at this point. Keep in mind that the OFHEO index is created using data on mortgages from the GSEs. So, essentially the data is restricted to mortgages that conform to GSE specifications, which means jumbo, nonprime, high LTV, option ARMs are not being included. In the current housing market, that is missing a lot of houses. Also, GSE’s started buying IO loans only from 2005 and have stepped up their rate of purchase of these loans.
    Another point to note is that the OFHEO index, by construction, tends to smooth the data and is likely to miss sharp turning points. That may have been alright in the past when we had rolling housing downturns, not now.

  5. SkepMod

    Your state If one takes a market fundamentals view of the last five years, the earlier price appreciation would be attributed to falling interest rates, growing population and income, and restricted housing supply.
    What about consumers choosing to allocate more resources to housing than they have in the past? Call this the HGTV effect. Not only are we Americans spending more $$ on housing, we are also spending more of our time on it.

  6. allen

    SkepMod, the question is, how much of that HGTV affect was actually driven by the large increases in housing valuations. I suspect if by some strange twist car prices went up after you bought them and at that they were going up 7%, 10%, 20% a year we’d all be out there pimpin’ out our rides. The real test in people’s interest in their homes will come as prices moderate or even decline. I wouldn’t be suprised to see drop off as the lack of return cools interest on top of the lack of equity to pay for the projects.

  7. Mike R

    Jim,
    You say that,
    “And what then would become of the billions in interest-only, no-down-payment loans currently outstanding, and the home equity loans that have financed much ongoing consumption spending?”
    which is an excellent question. I am wondering if you know if data exists that breaks out consumption spending by its sources? In other words, do we really have any idea what consumers are doing with the cashed-out equity in their homes?
    Thanks,
    Mike

  8. j. Hudson

    You know in the Knoxville TN area it is almost cheaper to by existing structer then it is to build. Building costs are making building to expensive for the blue collar. thanks for this outlet,.

  9. alex

    All the special discounts now offered are not included in that statistics. Real prices are not necessarily what OFHEO reports….keep that in mind, folks.

  10. John Thacker

    The real test in people’s interest in their homes will come as prices moderate or even decline.
    Yes, but there’s still an effect in overall house prices because homes have continued to grow larger.
    The entire housing bubble is interesting because it’s an incredibly localized phenonmenon. The same handful of metro areas that saw prices shoot up are the same ones seeing declines now. (With the exception of still-hot Phoenix, it seems.)

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