Summary
The emergence of home price stabilization is spotty and should not be over-simplified. It’s important to look at the underlying indicators to see where stabilization is actually taking place.
Analysis
Recent reports of price appreciation are comparing apples and oranges. We
are extremely concerned that policy makers, banking and real estate industry
executives, investors and others will use misleading home price data to
conclude that home prices have stabilized. They have not.
These same influencers used this data in 2006 and 2007 to make decisions,
many of which have proven to be poor decisions. It was a tough lesson, and
hopefully one that won't be repeated.
This is a complex issue. Here is why:
Reported home prices and home price indices rely on a small sample of
transactions that represent far less than 1% of the owned homes in an area.
The rise of subprime-related loans in 2004, and the subsequent foreclosures
since then, has skewed the price data significantly. There are many issues
associated with the price data, including heavy discounts on distress sales.
Because the bulk of the transactions since 2004 have also been in lowerpriced
neighborhoods, the following has resulted:
Recently reported median prices have been lower than the true value of the median home in the market, resulting in reported prices today that are far less than the value of the median home in an area.
Case-Shiller and other indices have been misinterpreted. They reported a higher percentage appreciation than occurred on most homes in 2006, and more price depreciation than has occurred on most homes since that time because their
sample size is based on what has been transacting. Transactions have predominantly been limited to homes in lowerpriced neighborhoods. The Case-Shiller and Zillow tiered price indices show this clearly, but this granular detail is
usually too much for most news articles.
Today, we are seeing the mix of transactions shifting back to the typical neighborhood. That mix shift is causing the median price to increase when, in fact, there is no real price appreciation going on. Our analysis of 390 metro areas across the country
shows that the percentage of markets reporting a month-over-month increase in the median price has jumped to 39% from 22% two months earlier. What is really happening is that people are now comparing the price on a 3-bedroom home in a typical neighborhood to the price on a 3-bedroom home in a poor neighborhood - because that's what was selling several months ago.
We also believe that Case-Shiller and others could report an overcorrection because the low-end price correction has slowed, but the high-end price correction is accelerating. If the high end grabs a large percentage of the transactions, the indices could over-report the price correction because of double counting this phenomenon.
Depending on the decision you are trying to make, there are solutions to understanding the right pricing methodology to use.
This includes some relatively new tools and indices. Before you make an important decision, be sure that you understand the facts behind the pricing measures you are using.
John Burns consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
