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- Equity can’t be withdrawn - General drop in consumption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

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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

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120

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OHFEO House Price Index

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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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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%

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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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Sources:S&P Case-Shiller Index; Census Bureau; BEA; Moody's Economy.com.

Figure 2San Francisco: House Price Trends

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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