The S&P/Case Shiller® composite index (graph here) for the month of May was released Tuesday.
"After 16 consecutive months of record annual declines, beginning in October 2007 and ending in January 2009, the indices have now shown four consecutive months of improvement in annual returns. . . . 'The pace of descent in home price values appears to be slowing' says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. 'There is a clear inflection point in the year-over-year data, due to four consecutive months of improved rates of return, after the steep decline that began in the fall of 2005. . . . While many indicators are showing signs of life in the U.S. housing market, we should remember that on a year-over-year basis home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.' Mr. Blitzer added.”
28 comments:
Inflection point or local minima?
Interestingly, the series is relatively consistent - From December 99 to May 06 it was up every single month, no "blips" no stops. Likewise, every month from June 06 to March 09 had no blips or bounces of any type.
At the end of the last bubble (early 1990s) when it first switched from negative to positive, the index value was 87.56 (April 1991). That was the rock bottom nominally. The next 6 years was spent running in place while inflation whittled away (real) values.
If that trend repeats itself, we saw nominal bottom in March 2009, and we will now see another long bout of stagnation.
Now, its conceivable this is a mere stopping point to a much lower level, but the data doesnt suggest that. There is no point (1987-2009) where we had 2 sucessive positive months, followed by another long bout of declines.
So is this the nominal bottom or is it "different this time"? I guess we shall see.
CRT-
I think that it was the inflection point unless interest rates move up quickly. Affordability has helped put a floor in, but the only think keeping housing affordable is rock bottom interest rates.
My hunch is a take on CRTs: in many areas, the low-end is played out (but it might settle down after $8k and artificial interest rates peter out). But, the mid and the high end still a bit bubblicious. I don't see any increases in the horizon* for the mid and high end. My hunch is that we'll see further declines, followed by stagnation. Option #2 is pure stagnation (CRT).
From what I can tell, baring the odd exception, is that compared to last year, 'identical' houses ($500k+) are selling for the same or slightly less. The reason I put 'identical' in quotes is that they are identical in model name (and tax assessment) only: the ones that are selling are updated and ready for a move-in (and there is the odd exception). In comparison, the 'same' houses that sold were...in a much more modest shape. Not dumps inside, but not Architectural Digest. Something in-between. The ones that aren't updated are sitting and rotting on the vine.
* ignoring odd monthly blips, in case some digs this up in the future.
housebuyer: and if interest rates move up, then it's a local minima?
As others have said to one extent or another, the key question here is government intervention in the markets.
The artificially low interest rates, buyer bribe, and of course FHA trying to take over for subprime...
To varying extents these have all helped prop up the market.
If/when these efforts are rolled back will be a big question moving forward.
Nova-
If interest rates move up quickly I think sales pace will slow dramatically, and prices will drop so yes this would make a local minima.
Leroy-
The FHA has always been an easy way to get a house with little money down. This hadn't changed since it was founded around the great depression. The only real change is they changed the house price limit in expensive areas, which isn't really that big of a deal.
In all fairness, I do think it could be "different this time". It was clear the rate of decline had slowed, but I did not expect it to go positive so quickly - figuring we had 3-4 more months of deceleration before turning positive. (Again nice call Housebuyer)
Given the surprising strength of the bounce, it very well could be we have a local minima as Novawatcher says before bottoming out next year. Then again, it just as easily looks like it could be a "v" shaped bounce.
Bottom line - given the unprecedented severity of the drops for the last 3 years, history may not be as good a guide as what it was in the past.
I think the graphs a while back from CR that cover other regions drops is a better "guide". All possible behaviors were seen, well, no, no one saw a "v". But a long trailing tail of declines, stagnation after only getting part-way down to the pre-bubble trend line, a wavy seasonal downturn with multiple bear rallies, a drastic fall + overshoot. All of these have happened somewhere. So, any of them could happen now.
But, I would say the $8k incentive, and the insanely low interest rates are two things we know for sure are different this time. So, getting a couple months in a row of increasing "seasonally adjusted" (see CR's complain on that too) data in no way precludes further declines.
But I think we're seeing a lot of strength from pent-up demand. There were a heck of a lot of well-to-do renters in FFX back in 2007. A lot of people who waited, maybe just storing up a downpayment, maybe actually "knowing" it would crash, so I don't think this area is going to overshoot.
housebuyer: I'd say the FHA limit is a big deal around here. One place I put an offer on had two FHA offers fall through (buyers got cold feet in one case). This place was $675k.
novawatcher,
Are you serious?? People are actually trying to get FHA loans over $417k? OMG. Madness.
The question is, are sellers taking these offers? I guess if they offer you above your own WTF list price, then yeah, why not try to sell it to them?
"Cara said...
I think the graphs a while back from CR that cover other regions drops is a better "guide". All possible behaviors were seen, well, no, no one saw a "v". But a long trailing tail of declines, stagnation after only getting part-way down to the pre-bubble trend line, a wavy seasonal downturn with multiple bear rallies, a drastic fall + overshoot. All of these have happened somewhere. So, any of them could happen now."
I think we need to be careful drawing too much from other areas because unerneath all the bubbling and busting are underlying fundamentals that either prop up or betray an area (e.g. using Detroit's performance for - well - anywhere). Basically, its different everywhere.
"Cara said
But, I would say the $8k incentive, and the insanely low interest rates are two things we know for sure are different this time."
I think we need to be careful too on ascribing to much influence to this. Im not putting you in this camp Cara (or really anyone on this blog), however, many of those who said the government intervention "wont stop anything" are the same ones blaming it for ALL the strength we are seeing now. In a way, this reminds me of the "shadow/holdout inventory" discussion that started once it became increasingly apparent that inventory peaked - sometimes, the simplest answer is best.
That said, I do think there is something to the govt propping up effort. If I am intellectually honest, I have to say this as I was one of the ones thinking it could arrest the declines - so I cannot completely dismiss them now.
Honestly, if the govt is so intent on propping up markets, I wish there was some way to target it - pull it away from stronger markets like DC & SD where it looks like we have reached an inflection point, but leave it in place in weaker markets like LV & PHX.
Cara: in this case, the FHA offers fell through twice. I think the first one fell through because the loan fell through. The 2nd one fell through after being 'under contract' for a month or so because the buyers got cold feet (The reality of a >$4k PITI made them change their minds). I don't know who financed the eventual buyer, but I had heard that the seller was now refusing to deal with FHA-funded buyers.
CRT,
sure, but we have only one recent bubble in DC where most of the fundamentals are going to have been the same. I think the conclusion one should gather from the diversity of data is that no two bubbles are alike, whether they are subsequent ones in the same area or bubbles in different areas under the same national pressures (such as they are). It would be foolish to say, we are most like city X, and claim that's what we're going to do this time, instead there are enough things that are different here such that we shouldn't expect the same exact behavior as last time (which is what you were saying). Diversity is the rule, not the exception.
I also wish there were a way they could target market support if they're going to keep it up. The $8k they could do like they did the hybrid rebate, have it faze out for a given zip code? district? county? state? once X number of people have used it.
"Cara said...
The $8k they could do like they did the hybrid rebate, have it faze out for a given zip code? district? county? state? once X number of people have used it."
Thats not such a bad idea. Its a bit of an administrative nightmare, but not like the govt isnt used to that!
Cara asked,
Are you serious?? People are actually trying to get FHA loans over $417k? OMG. Madness.
*raises hand*
We have a 10% DP, but why use up that cash when we only have to put down 3.5% (or 5%, as we will be doing).
Yes, there are jumbo FHA buyers who have stellar credit, steady jobs, and cash in the bank.
But if you're willing to do 5% you don't have to go the FHA route. Is the FHA PMI and rates better?
I haven't seen any loans available for just 5% down that aren't FHA (or VA, which we don't qualify for). Where have you seen these?
Minimum I've seen is 10% down, and if I'll be paying PMI anyway, what is the benefit of 10% over 5%? None, in my book.
PaKa,
My credit union's still offering them. (not that it's one that outsiders can join) But maybe not in that price bracket.
(agreed on the 5% versus 10%, if you can't do 20% you might as well keep the cash on hand).
Cara-
From what I have seen there are a few lenders that have special programs that will allow you to put 5% if you are buying a SFH(generally the rate is not good). Other than these special programs Paka is right and you need at least 10% down.
Paka-
My office mate is also in your situation where he has 10%, but doesn't want to put basically every penny he has into the house. He figured the small difference in rates is worth keeping a 20-30 cash cushion.
Cara: My FHA loan story has major implications. What we basically saw was a couple that had 20%-down and a stellar credit rating get outbid by someone who could only put 3% down with a government-sponsored funny loan.
Sorry, I'm not going to play that game, as it is rigged against me.
Novawatcher,
But if the bid didn't go through to close, then it didn't effect prices.
But yeah, I hear you completely. It's one reason that shorts are more appealing at this juncture, because buyers who actually need that $8k can't bid on them, because they can't guaruntee they'll close in time. Hopefully the seller's bank agrees with me on that line of logic when deciding whether to sell to us or get it relisted at an approved price.
But yeah, I really don't want to "play" right now in the open market. Too much funny money out there.
Cara: one bid did go through to close, it's just that the buyers backed out at signing.
Either way, it's artificial demand. Imagine how much cheaper housing would be right now (or next year) without this nonsense? Then, guys (or gals?) like PaKa might not need an FHA loan.
Novawatcher,
It's an interesting philosophical question, if 20% down were mandatory would housing prices drop in half so that PaKa's 10% would become 20%?
Remember way back when I used to claim, "20% down, here we come!"? Ah, the good old days. I did not comprehend how much FHA could be expanded, how much MBS the government could both issue and buy. Given I didn't comprehend that, I'm not sure I'm qualified to say whether it's sustainable or not. This is going to be quite some hangover.
My mom's refinance which closed in June? Has been bought and sold 4 times now, the latest by a GSE.
"Novawatcher said...
Either way, it's artificial demand. Imagine how much cheaper housing would be right now (or next year) without this nonsense? Then, guys (or gals?) like PaKa might not need an FHA loan."
Nova - remember, we had that situation prior to the 1930s. It didnt change the price of housing much, but it did create a class of perma renters who could never put together enough to pay for the place.
Honestly, I think its a question of whether the person had the money (and didnt want to use it), or they didnt have it in the first place.
In my case, I have enough for a 20% DP. In addition to this, have a years salary set aside for emergencies, I have a another amount set aside in savings, and I have some walking around money. Despite this, I may go to a 5% loan with a similar interest rate. Why?
In all honestly, I just like having the cash. I just like having the money in my account. I like having the flexibility to do with it what I want. To take advantage of investment opportunities if they arise. After all, I can always pay it into the house later to get me up to 20% or more -- but once I do it, I cant get it back out -- so why pay it now?
The response is "well if you like having that money, that means you truly dont have 'enough' saved, so you should save more.
So I save more, say I save enough for like a 40% DP along with all the things I mentioned. I still would likely go with the 5% loan for the same reasons. At which point the same objection is made, along with my same response, and around and around we go.
If you think about it -- whats so magical about 20%? Why not 25% or more? Im sure the tables could be turned and I rail against a system who allows you to use "only" 20% down when I am prepared to pay all cash. My guess is there very well could have been howls of protest when the entire 20% down finance scheme was created in the 1930s.
Im not saying your wrong IF the people truly didnt have money (whatever that means - see my example above). However, recognize that there are some people who do have the DP yet desire to pay more in interest not to spend it. I see nothing irrational or wrong about that.
Excuse me as I will now put on my heat shield and prepare for the eventual rant from gte ;)
CRT,
If higher down payment requirements did not lower the chance of foreclosures and people who are not really ready for home ownership, then why do so many Manhattan co-ops require 25% or more in down payment?
Even Barney Frank is admitting that banks need to require some down payment. People have to have a "skin in the game."
TBW - I understand, but whose to say 20% is the magic number for everyone? Why is that enough skin? Why not 50%?
My point is basically a philosophical one. I think it all comes down to you are either responsible, or you arent. There is no way I would ever default and ruin my own credit rating. Before this whole thing started I thought everyone thought like me. Clearly I was mistaken.
True, if you take away the punchbowl and instill 20% across the board, you likely prevent many things like this from happening - so it not a bad "across the board" rule. Im just pointing out however, that those who choose less than 20% dp are not always irresponsible.
CRT: From what I understand, the 20% down is for historic/actuarial reasons. I think the primary reason is that if someone put 20% down and the bank had to foreclose, they were unlikely to lose money.
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