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What Are House Prices Telling Us?
Karl E. Case
February, 2009
Why do home prices matter?
• Houses are collateral for mortgage debt
• If prices continue to fall, the 2008 and 2009 books could be unprofitable
• Some $4 trillion has been lost form household balance sheets – household spending has fallen:
- Equity can’t be withdrawn - General drop in consumption
Housing Starts (Census Bureau SAAR)
January 2006 (Peak) 2.273 million units
December 2008 550,000 units
Down 1.723 million units
Average Fixed Investment Per Unit (ex: Land)
$250,000
Total Annual Direct Lost Production $431 billion
Total Lost Production(multiplier: 1.4)
1.4 x $431 b=
$603 billion
Annual Lost Production As Percentage of GDP
4.2% of GDP
Effect on GDP
3 Months Net Change Total Nonfarm Employment (trailing quarter)
-2000
-1500
-1000
-500
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House prices are hard to measure and interpret
• Asset values in “normal times” must be based on actual arms length closed transactions between willing buyers and sellers,
• Relatively few units are sold in a year,• Housing is heterogeneous: a house is really a
bundle of structural and neighborhood characteristics,
• Markets are sometimes “illiquid”• Housing is fixed in location: arbitrage difficult.
Two Market Clearing Processes
• Normal times: Sellers resist, buyers lowball, “sticky prices,” inventories high, production falls…
Figure 9Housing Starts, 1972-December 2008
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Two Market Clearing Processes
• Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls
• Foreclosure auctions: prices less sticky,
distressed sales
• What are the S&P Case-Shiller Indexes?
• What are they telling us?
S&P Case-Shiller Home Price National Index
0
20
40
60
80
100
120
140
160
180
200
OHFEO House Price Index
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50
100
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350
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450
Table 3
S & P Case-Shiller Index -- Through October 2008
Released December 30, 2008
Metro Area Peak % ∆ Since Peak % ∆ Last Year%∆ from August to
September%∆ from September to
October%∆2000 to October
2008
Phoenix June 2006 -40.6% -32.7% -3.5% -3.3% +35.2
Las Vegas Aug. 2006 -39.8% -31.7% -2.6% -2.7% +42.6
Miami Dec. 2006 -37.8% -29.0% -2.6% -3.0% +73.4
San Diego Nov. 2005 -36.4% -26.7% -2.4% -3.0% +51.1
Los Angeles Sept. 2006 -34.3% -27.9% -2.5% -2.6% +79.8
Detroit Dec. 2005 -32.2% -20.4% -2.5% -4.5% -13.9
San Francisco May 2006 -36.1% -31.0% -3.9% -4.2% +39.4
Tampa July 2006 -30.5% -19.8% -1.8% -3.1% +65.4
Washington D.C. May 2006 -26.3% -18.7% -2.2% -2.7% +84.9
Minneapolis Sept. 2006 -20.6% -16.3% -1.0% -3.4% +35.7
Cleveland Aug. 2006 -11.9% -6.2% -0.6% -1.0% +8.8
Boston Sept. 2005 -12.8% -6.0% -1.1% -1.1% +59.2
Chicago Sept. 2006 -13.7% -10.8% -1.1% -1.6% +45.5
New York June 2006 -11.9% -7.5% -1.0% -0.9% +90.0
Atlanta Aug. 2006 -11.4% -10.5% -1.3% -2.4% +19.8
Seattle July 2007 -11.4% -10.2% -1.4% -1.4% +70.5
Denver Aug. 2006 -8.0% -5.2% -1.3% -1.5% +29.1
Portland July 2007 -10.8% -10.1% -1.3% -1.9% +66.4
Dallas June 2007 -4.2% -3.0% -0.8% -1.1% +20.6
Charlotte Aug. 2007 -5.8% -4.4% -1.3% -1.8% +28.0
Composite 10 June 2006 -25.0% -19.1% -1.9% -2.1% +69.8
Composite 20 July 2006 -23.4% -18.0% -1.8% -2.2% +58.2
Fig 11: US total quarterly originations 2000-2008
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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ills)
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7Refinance Originations Purchase Originations Target fed funds rate
Updated estimates provided by Jim Kennedy of the mortgage system presented in "Estimates of Home Mortgages Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41."
US National +89%Composite 10 +128%Composite 20 +107%
Miami +181%Bottom tier +241%
Los Angeles +173%Bottom tier +239% Washington DC +151%Bottom tier +197%
San Diego +150%Bottom tier +196%
Las Vegas +134%Bottom tier +193%
Phoenix +127%
20
00
-20
06
How Did this Happen?
• 35 Years of rising prices• The recession of 2001• Fed’s preemptive strike in late 2000• Highly “exuberant” consumer• Boomers armed with equity• .com bubble bursts: real assets look good• Low rates and Fed expansion continues• Mortgage rates spike in 2003:2• Underwriting quants did loan level analysis• Sub-prime!• Low rates led many into homeownership Provided a big pool of first time buyers Boomers could move up
• Fierce competition among originators, agencies, Wall Street, Banks and Insurers
• Underwriting, quants and risk based pricing• Housing skipped the 2001 recession• Fraud• Increasingly exotic A- paper: stated income….• World wide liquidity: the DarkMatter story• Pure speculative bubble in 4 states: P&Q• Huge run-up in the lower tier • Immigration• Foreign Demand• Government encouragement of homeownership: tax law and CRA• Leverage
Auctions in November, 2008 U.S. and Top Four States*
(Foreclosure auctions by state in hundreds)
Number of % of Total Auctions Existing Sales The U.S. 87,700 21%
Top 4 (54%) 47,300 60%
Arizona 8,100 87% Nevada 3,100 62% California 24,100 58% Florida 11,400 52%
Bottom 47 (46%) 40,400 12%
Figure 8Home Sales Price/Per-capita Income Ratios for Los Angeles Metro Area, Q1 1987-Q1 2008
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Mar
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-08
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ce/
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me
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io
Sources:S&P Case-Shiller Index; Census Bureau; BEA; Moody's Economy.com.
Figure 2San Francisco: House Price Trends
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50
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'87 '87 '88 '88 '89 '89 '90 '90 '91 '91 '92 '92 '93 '93 '94 '94 '95 '95 '96 '96 '97 '97 '98 '98 '99 '99 '00 '00 '01 '01 '02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08
1988 2003 2007 2008
Perceptions: Which best describes the area home price trend?Rising Rapidly 84% 29% 4% 1%Rising Slowly 13 51 38 4Not Changing 3 14 17 4Falling Slowly 1 6 2 33Falling Rapidly 0 0 39 57
Expectations: It's a good time to buy because prices likely to increase.Agree 95% 82% 58% 80%
House Price Changes Case-Shiller Zip Codes Boston 2008-Q1
Percent ChangeCity One-Year Five-Year Ten-Year MedianBrockton -14.85 +6.53 +137.06 $230,000Lawrence -13.02 +14.01 +167.94 $165,000Worcester -11.28 +6.76 +101.64 $230,000Lynn -10.47 +5.40 +109.33 $250,500North Dartmouth -10.15 +13.72 +123.90 $258,000Northborough -9.09 +5.02 +83.97 $372,000North Andover -7.48 +2.81 +77.53 $500,000Westborough -6.43 +7.19 +82.55 $350,000Andover -5.55 +3.63 +81.47 $519,000Lynnfield -5.22 +10.45 +103.29 $494,000Southborough -5.20 +9.75 +88.92 $533,000Springfield -5.15 +46.53 +125.77 $159,000Weymouth -5.00 +10.53 +127.50 $285,000Gloucester -4.45 +8.31 +105.27 $385,000North Adams -3.82 +40.14 +101.58 $127,000Walpole -2.66 +11.68 +98.75 $402,500Billerica -2.51 +9.87 +94.99 $326,000Weston -.94 +13.62 +95.45 $1,202,500Lexington -.45 +11.70 +98.29 $839,000Wellesley Hills -.29 +16.73 +101.76 $1,210,000Lincoln -.22 +12.03 +99.14 $1,045,000Dover +.21 +17.50 +105.37 $932,500Needham +.64 +16.10 +103.57 $716,500Belmont +.68 +17.21 +108.87 $722,500Waltham +1.03 +16.26 +109.30 $389,000Newton +2.74 +19.93 +110.01 $895,500Cambridge +12.63 +40.75 +166.84 $590,000