Two Stories That Explain Each Other Perfectly

A lot of attention is given every month to the release of the Case-Shiller Index, a national gauge of housing values with a unique statistical process. While there are undoubtedly both pros and cons to the methodology, the REALTOR® community has been unnecessarily venomous to the Index, often calling it out as some sort of quackery. So let me make it clear up front that the point of this post will not specifically be to harangue it.

But...

Much ink was spilled yesterday about the release of the January Case-Shiller Index, which showed January's housing prices falling by a record amount. The typical headline for this story reads much the way the Star Tribune's take on the story does: Twin Cities Home Prices Suffer a 20% Plunge. And our overall median price numbers from MLS data show a very similar picture, with recent declines in prices reflecting 20-25%. In other words, dear homeowner: your home lost 20% of its value in the past year.

But the problem with this oversimplified assumption, and the problem with the world's current statistical tools for measuring the movement of housing prices (both for Case-Shiller's methods and for ours) is that what kinds of properties are being sold is having a dramatic skewing effect on our metrics.

Case-Shiller's methods do not account for distressed foreclosure or short sale properties, which comprised roughly 60% of Twin Cities home sales in January and February.

How fitting then, that the Star Tribune has a great story the day before the launch of the January Case-Shiller numbers that helps explain the 20% drop in overall home prices to perfection:

The market for foreclosed and stripped houses has gotten so bad on the North Side of Minneapolis that lenders are walking away from some closings barely clearing any money when they unload a house.

Just ask real estate agent Scott Ficek. He represented investors at a closing Friday at which the lender walked away with a grand total of $69.60.

That's because normal closing costs plus city assessments against the property at 1914 Russell Av. N. nearly ate up the entire $12,500 sales price.

In the last 9 months, banks and lenders have aggressively discounted the asking prices of their foreclosures in an attempt to clear them from their balance sheets. They've cut prices so far that they're sometimes netting next to no cash on the actual sale of the home. The pleasure of removing the liability from their balance sheet makes the minuscule financial return worth it.

In a world where 50-60 percent of what is being sold is a part of this metrowide "liquidation sale," it's no wonder that the standard metrics are relatively worthless at this point. The market must be separated into lender-mediated and traditional categories to make any sense of it. And so far, traditional home values aren't declining at a clip of anywhere close to 20%. The reality, so far, has been closer to 5%.

Takeaway #1: Take any news story or headline you hear stating that housing prices have dropped "x" percent with a boulder-sized chunk of salt.

Takeaway #2: We need better metrics to understand home prices. Our methods of looking at median price AND the Case-Shiller method of looking at paired sales just aren't getting it done.

Comments

[Erik]

Hey Jeff,

Great article! I was wondering if you calculate an affordability index for traditional vs. lender-mediated sales. Has the 5% drop in traditional sales prices coupled with low interest rates made these properties affordable for the median home buyer, or do you think prices need to drop closer to the foreclosure price level?

--Erik

[Scott]

Hi Jeff.

Thank you for the article. It's too bad that, for refinancing purposes, people with good credit and no issue paying their current mortgage get valuations of property based on the 20% drop and not the actual drop for owner occupied housing.

[Jeff Allen]

Erik-

We have calculated an HAI of lender-mediated vs. traditional. Take a look here: http://mplsrealtor.typepad.com/theskinny/2009/02/home-sales-are-briskwith-a-caveat.html.

Measures of affordability have to be taken with that same salt boulder.

-- Jeff

[Mike Weiland]

Jeff,
Overall this is very encouraging news! Thanks for the detailed work. I've also experienced irrational bank behavior such as your example above. As long as the liquidation continues the sooner we'll get through this.