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What direction are home prices going? Depends on which index you trust.

Posted by: Prashant Gopal on March 31, 2009

Are home prices recovering or are they falling faster than ever? It all depends on which closely-watched index you believe.

The Case Shiller index of home prices in 20 major cities released today showed that prices fell 2.8% in January from December, and dropped 19% from a year ago, the steepest annual rate on record. Last week, the Federal Housing Finance Agency reported that U.S. home prices actually rose 1.7% in January compared to December (on a seasonally-adjusted basis), the first increase in a year.

I called Andrew Leventis, senior economist at the Federal Housing Finance Agency (formerly known as the Office of Federal Housing Enterprise Oversight) and he also seemed a bit perplexed by the conflicting results.

“These are price changes that are unprecedented in recorded data history for real estate,” Leventis said. “When there’s so much volatility in the market, your model does its best to fit the data points, but the data points are all over the map.”

It helps to understand how both indexes are calculated. They are close cousins, because they track the repeat sales of the same homes. But the Case-Shiller index uses information from county recorder and assessors offices and include sales involving subprime, conforming, and jumbo mortgages. The FHFA index measures sales of Fannie Mae and Freddie Mac mortgages and does not capture subprime loans or jumbo sales, which are typically above $417,000.

Leventis said that both indexes are susceptible to statistical noise, especially in a monthly sample. An unusual number of sales in California, where sales of bank-owned properties are surging, could skew the numbers in one direction. Including more sales in other stronger markets could push the prices in the other direction, he said.

It seems that one explanation for Case Shiller’s huge drop is that the luxury home market has been hit hard in recent months. High-end homes are lingering on the market and sellers are dropping prices. At the same time, foreclosures are pushing down prices on the lower end. FHFA doesn’t include most jumbo sales or foreclosure sales that involved subprime mortgages.

Leventis said he expects that the FHFA index for January will be revised downward when the February report is released next month.

Brian Bethune, an economist at IHS Global Insight in Lexington, Mass., said the truth about the market is probably somewhere in between.

“You probably have to meld the two together and combine that with the fact sales volumes were up in February,” Bethune said. “To some extent, the silver lining is that with the crisis, prices have come down to a level where people have come back into the marketplace.”

Reader Comments

Leanne Finlay

March 31, 2009 3:36 PM

It makes sense that the data that doesn't include sales with mortgages above $417,000 show an increase of volume -- jumbo interest rates have been very expensive compared to conventional and FHA/VA rates, so more buyers have been competing for the same properties than they would if jumbo rates were more normalized by comparison to the conventional/FHA/VA rates.

We have got to get the housing market stabilized, and quickly, or unemployment will continue to rise.


March 31, 2009 11:26 PM

No Leanne, we have to let the housing market finish correcting - so that home prices are in line with historic price to income ratios. Right now young families are still priced out of all but the worst condition homes and foreclosures. When everyone with a good job and decent savings can afford a 20% down conventional mortgage then we'll know the economy is on the way back up.

The Mad Hedge Fund Trader, San Francisco, CA

April 1, 2009 5:27 PM

Yuba County, California, a semi rural area in the Sierra foothills commuting distance from Sacramento, has the highest underwater rate in the nation. There, 78% of all homes have larger mortgages than the houses are worth, and the numbers are rising. Four out of the five highest negative equity counties in the US are in the Golden State’s Central Valley.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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