Investment Postcards from Cape Town

Robert Shiller, economics professor at Yale University and co-creator of the S&P/Shiller home-price index, talks with Bloomberg’s Carol Massar about the US housing market. The S&P/Case-Shiller home-price index climbed 1% from the prior month, seasonally adjusted, after a 1.2% increase in July, the group said. From a year earlier, the gauge fell 11.3%, less than forecast. (The S&P/Case-Shiller Home Price Indices can be accessed here.)

Click here or on the image below to view the interview. (There is no longer embedding available for the Bloomberg videos on YouTube.)

Source: Bloomberg (via YouTube), October 27, 2009.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

The Financial Ad Trader - banner ads

Email

Digg

Del.icio.us

Technorati

Stumble

Reddit

Facebook

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

I compare three competing monthly home price indices: the S&P Case Shiller Composite 20, the FHFA purchase-only index, and the LoanPerformance HPI. Over the year, the stabilization in home values is evident across the board. However, on a 3-month annualized basis, the majority vote shows a stark second-derivative improvement in home values.

The differences between the S&P Case Shiller Composite 20 and the FHFA (formerly OFHEO) purchase-only index are well known. The FHFA tracks home values of mortgages guaranteed by Fannie Mae and Freddie Mac (conforming mortgages only). The S&P Case Shiller Composite 20 does not discriminate and includes home values tied to jumbo mortgages (non-conforming mortgages) as well. On the other hand, the monthly FHFA covers a broader geographic region, including all of the census regions, while the S&P Case Shiller Composite 20 covers just 20 metropolitan areas.

The monthly LoanPerformance HPI claims to be both geographically superior, building its index up from the bottom at the zip-code level. It covers all 50 states, including D.C. (see its methodology at the bottom of the page), and tracks home values of all loan types. This is the HPI used by the Fed to calculate the value of real estate assets in the Flow of Funds accounts.

The chart above illustrates the annual growth rate of each home price index, where each index is showing stabilization in home values on a Yr/Yr basis. However, over the last three months, it is a very different story.

This chart illustrates the 3-month annualized growth rate of each home price index. The annualized growth rate is the implied growth rate over the next year if the next 3 quarters saw the same growth rate as the latest quarter (February ‘09 through April ‘09, the latest data point).

Here, the stories diverge. The S&P Case Shiller Composite 20 is still falling at a very quick rate, -18% annualized. However, the FHFA and LoanPerformance HPI are showing stark improvements over the last 3 months, -5% and -3% annualized growth.

If this was a majority vote, FHFA and LoanPerformance would win, and the monthly growth in home values is not as dire as suggested by the S&P Case Shiller Composite 20. There has been significant second-derivative improvement in the last three months.

Source: Rebecca Wilder, News N Economics, July 20, 2009.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

The Financial Ad Trader - banner ads

Email

Digg

Del.icio.us

Technorati

Stumble

Reddit

Facebook

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

How does an excess supply get remedied? By allowing prices to fall and by cutting production. This remedy applies to everything from hogs to houses. It is well documented that the prices of houses have plummeted. What may be less well known is that newly-started production of single-family homes has come back into equilibrium with the sales of new single-family homes - at least through April. Chart 1 documents that starts of single-family homes ran at a seasonally-adjusted annual rate of 368,000 in April, a touch above sales of new single-family homes at a seasonally-adjusted annual rate of 352,000.

Chart 2 shows that in recent months the ratio of single-family house starts to sales of new single family home sales is at it lowest level in 47 years. This is not to gloss over the fact that there still is a large supply overhang of new homes for sale that either have been completed or are under construction (see Chart 3).

But again, markets work. The housing market is moving toward a new equilibrium with production being curtailed and prices falling.

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, June 15, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

The Financial Ad Trader - banner ads

Email

Digg

Del.icio.us

Technorati

Stumble

Reddit

Facebook

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

In terms of the level of mortgage rates, the sale price of houses and the income of families, the affordability of home purchase of late is higher than it has been in about 40 years (see Chart 1).

With Thursday’s release of flow-of-funds data by the Fed, I can demonstrate yet another factor suggesting the current attractiveness of a home purchase - the implicit yield on owner-occupied housing in relation to the cost of financing a house purchase.

I calculate the implicit yield on owner-occupied housing by dividing the “space rent on stationary owner-occupied housing” (from unpublished GDP data pertaining to personal consumption expenditures) into the market value of household real estate (from the household balance sheet data in the Fed’s flow-of-funds accounts). Then I compare this implicit yield on owner-occupied housing with the level of mortgage rates pertaining to the sales of existing single-family homes. Chart 2 shows a history of this calculated implicit yield on housing and the financing or mortgage rate.

In the first quarter of 2009, the implicit yield on owner-occupied housing was 6.02%; the contract mortgage rate was 5.07%. The data in Chart 2 show that it is rare for the implicit yield on housing to be above the cost of financing a house. In fact, from the late 1960s until now, the implicit yield on housing has always been below the mortgage rate.

Of course, the factor that has driven up the implicit yield on houses has been the recent extraordinary decline in real estate values rather than an extraordinary increase in “space rent” on owner-occupied housing (see Chart 3). This is not to say that the implicit yield on housing will not move higher over the remainder of this year, especially if residential real estate values continue to fall, as I expect they will over the rest of this year. But mortgage rates already have moved higher in recent weeks. In sum, the higher relative implicit yield on owner-occupied housing is yet one more positive element arguing in favor of the bottoming of housing demand.

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, June 12, 2009.

*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

The Financial Ad Trader - banner ads

Email

Digg

Del.icio.us

Technorati

Stumble

Reddit

Facebook