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How Do We Track Housing?

Posted by Larry Doyle on March 12, 2009 7:07 AM |

housing-crisisAt the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again.  All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents

There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support.

Aside from the Case-Shiller Index, there is another index that tracks trends in housing and allows investors to reflect their opinions. This index, the ABX (Asset Backed Index), was created a few years ago by Wall Street to track trends in housing. Clearly given the emphasis on Obama’s housing, plans put forth by Secretary Geithner would have put some optimism in this index, right? Well, we are all aware of the enthusiasm put forth in Obama’s plan to support housing; however, no plan is a panacea and every plan has unintended consequences. Despite the best intentions in Washington, the market sees no bottom in housing. 

The ABX is not traded on an exchange and thus easily tracked. Enter my friends at 12th Street Capital who shared with me a few days ago that  the “ABX went out at its ALL TIME LOWs yesterday.  The real money sellers continue to push it lower in conjunction with the stock market and other credit markets and clearly the street has no interest in supporting the current levels, hence unless you have some real money buyers come into the
market you could expect to see continued softening.”

There you have it. Both indexes that track housing are at all-time lows. Thus, while the stock market had a nice bounce the other day, before we get overly ebullient about the potential for stocks, we want to see if we are seeing any sort of support in these two indexes. For my money, these will be the first two indicators showing a turn in our economy and giving me confidence to invest in stocks.

LD

Oddly enough, the ABX market did not participate in the rally on Tuesday.  In 2008 I would have said that the next day rally in ABX would almost be a certainty, however with continued uncertainty regarding government intervention on mortgages and MBS, it seems most longs are carefully picking their spot in the MBS market.

  • fiscalliberal

    Some how I have a hard time understanding that housing will be a leading indicator. I would be looking to a combination of items such as metals, unemployment reductions, clean up of toxic assets and most of all restructuring the banking system (including top management)before people have any confidence in getting back in. These things are not done in deteriorating. Untill then, it is traders and large funds only.

    More important we need to see some form of effective financial regulation come in with a sincere effort to litigate the fraud that existed in the financial collapse. In a certain sense it is the collapse, nonenforcement of our laws and in the end our values have not been supported.

    Most important the regulators need to show that in some way they are back on the job. Bernie Madow is only the tip of the iceberg, in the face of the collective fraud in Sub Prime underwriting, rating agency credibility, securitizing combinations of bad and good mortages (clouded by traunching) and most of all leveraging in the banking and insurance area’s. I guess I understand that Credit Default Swaps are a little different than insurance. However the nonaccumulation of reserves to pay in the event of a default is fraud.

    Yes, housing was important, but we need to recognize that it was a unsustainable bubble.

  • fiscalliberal

    The media is focusing on Madow today, but could I suggest the more important event is the House hearing on Mark to Market. one can view it on line real time or later via the website location

    http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr031209.shtml

    More over the website has the opening statemants of the people testifying and I find them pretty informative

    • Thanks for sharing.

      I have a sneaking suspicion that the mark to market rule will be suspended. That actin may be a catalyst for a major rally in stocks.

      One can not invest based purely upon a hunch but it is a gut feeling I have. I am not saying they should do it but they certainly COULD do it.

      Thank you again.

  • Fiscal,

    I would make the following comments.

    Unemployment is clearly a lagging indicator. We will see continued increases in unemployment after the economy has started to bottom and turn the corner. While many pundits view that bottoming process as occurring in the 2nd or 3rd qtr of 2009, I think it does not occur until 2010.

    The metals and shipping (via the Baltic Dry Index) will definitely be another indicator we will want to watch for a turn in the economy.

    Housing will improve when people who are employed feel a greater degree of security in their job. That will come when management gives them some assurances that things truly are improving. As that occurs I think we may see housing improve fairly rapidly. There are definitely some deals, especially on foreclsoed properties.

    The ongoing cleanup of the toxic assets and development of proper regulatory structures will be years in the execution.

    Clearly housing was an unsustainable bubble!!

    Thanks for your comments.

  • Rodney bemis

    Do you think the investment community is a little like the guy on the golf course where they sand bag until they suck you into giving them your money?
    Rod

  • Rod….You are clearly a very quick study!! Golf is most definitely the sport of choice in the investment community. Why? You hit the nail on the head. The broker gets you comfortable, injects a few beers into the process, lips out a few putts, but before you know it he had his hand in your pocket all along!!

    Lots of similarities!! These Wall Street guys are “stupid like a fox.”

    Sense on Cents is certainly having an impact far beyond what I would have ever imagined. I like it!!

    Thanks for taking our effort into a whole new realm!!

  • Rodney bemis

    good luck and keep us informed Rod

  • getfitnow

    LD, I didn’t know where to stick this question. Is it true that folks that “inflated” their income on their mortgage application qualify for a bailout; and that those receiving this assistance will also receive $1000 annually to paid down principle?

    • Larry Doyle

      Getfit…your question delves into the details of the program. Was the person intentionally inflating their income? Was the income changed by the broker from time of application to time of approval? There is a lot of noise on this very topic. Regrettably we will never know the truth but from my understanding people with inflated incomes will clearly benefit in this program in both manners. I believe they will accrue the $1000 if they remain current on their mortgage. There is definitely plenty of moral hazard in this program.

  • lizzy

    I wonder if housing prices still have to fall more. I live in Queens, N. Y. It seems that prices here are still far too high for people with a normal income to afford. If someone has two wage earners the prices are still too high. Thanks for the information about the housing indexes.

  • Larry Doyle

    Lizzy,

    There is no doubt that the metro NYC market remains one of the most expensive markets in the country. I think it was largely due to the proximity to Wall Street. While the Wall Street compensation levels have dropped like a rock in the last 12 months, the housing levels are slower to adjust.

    From what I understand there are very few transactions so it is difficult to say where the market really is.






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