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Housing Barometer Makes New Low

Posted by Larry Doyle on March 8, 2011 7:09 AM |

How do we measure what is really going on within the housing market? Regularly we see reams of housing data from new home sales, housing starts, building permits, and the Case-Shiller Housing Index. What are we to make of these various indicators?

Is there a common denominator that can be derived and utilized to measure what is truly going on within our housing market? Thanks to our friends at 12th Street Capital for bringing to our attention just such a vehicle. Let’s navigate, but bring your boots because where we’re going here does not look very pretty.

There is great demand to know what is happening with real estate prices.  For example, homeowners want to know the value of their biggest asset; builders want to project the profitability of their construction plans; lenders want to understand their underlying risk; property investors want to understand how to balance their portfolios of properties; and financial investors want to participate in the available returns.

But even in the face of such pervasive demand for knowledge and visibility, efforts to analyze information on real estate prices have been plagued by limitations: As a result of these limitations, real estate information is extremely difficult to translate into indices.

Nonetheless, indices are being created, but we believe the methods available until now suffer from some basic and significant drawbacks: To overcome these difficulties Radar Logic set out to understand the nature of real estate transaction pricing and how best to translate the total activity in an area on a given day into an index that reliably represents changes in the marketplace that day.

Rather than looking at the price of a house, we look at the price of a house per square foot as a means to make transactions comparable.

New Low For RPX

 This morning, the 25-metro-area RPX Composite price reached its lowest level since its peak in 2007. The value published this morning is based on data from home sales that closed during the 28 days ending January 3, 2011. At $183.18 per square foot, today’s RPX Composite price is 34 percent lower than its peak value of $278.32 per square foot, which reflects closings during the period ending June 8, 2007.

Today’s RPX Composite price is lower than the price for any other date since May 14, 2003.

RPX Composite reached new low on January 3, 2011

Radar Logic believes the RPX Composite price will continue to exhibit year-on-year declines throughout 2011 due to a growing supply of homes for sale and in the inventories of financial institutions, and weakening demand due to the reduction of government incentives for home buyers. Moreover, banks are facing uncertainty over whether they will be forced by regulators to expand mortgage modifications, and may reduce lending and tighten standards as a result.

“No matter what you call it, a ‘double dip’ or the continuation of a long process of deterioration, the current trend in home prices is evidence that housing markets are continuing to languish,” said Quinn Eddins, Director of Research at Radar Logic. “We expect the negative trend to continue under a severe supply overhang that includes a large and growing ‘shadow inventory’ of homes in default or foreclosure.”

The support line in the graph displayed above looks very precarious. If we do move below the current levels the next measure of support is down 15-20% to those levels seen back in mid-2002.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • coe

    LD – So much of “the American Dream” was predicated on the aspirations forged in each of us to create a higher standard of living than that of our parents’ generation, purchase a home of our own, and participate in the eternal optimism associated with always appreciating prices – with a pleasant side pocket benefit of the tax break afforded by the interest payment..well the dream has turned into a nightmare..ownership soared to near 70% of eligible buyers from the more normalized low 60% levels, delinquencies and foreclosures spiked up tied to the financial crisis, rampaging unemployment, and poorly underwritten/fraudulent originations, and public policy has been tied in a pretzel knot of sanctimonious political gasbags pontificating on matters in which they are both clueless and dangerous, an ineffective miasma of modification, forbearance, moral hazard, and partisan politics for what seems like an eternity..the banks are reluctant to lend and even more reluctant to clear the crease of their distressed assets for fear that the accounting marks will leave them crippled and vulnerable to the militancy of the regulators, investors are skeptical and demand, as they should, a risk premium to participate, the housing policy surrounding Freddie, Fannie, the Federal Home Loan Banks, GNMA, and the FHA/VA is best described as a comic farce with no clarity, no direction, and not a meaningful inch of progress for the past four years, forget liquidity in the jumbo market – those gears are quite rusted with the rating agencies still pretending they are meaningful after totally bungling their roles in the build up to the crisis..AND – housing prices have neither stabilized nor recovered in any real systemic way..I’m not sure at all that an index based on square footage has any logic to it (speaking of square footage – did you happen to see the article in the Times last weekend about the size of living quarters in Asia vs the US, and how more household dollars are devoted to education there than here where we are saddled with big mortgages and long and costly commutes?..consider the future shock of those costs!! – this coming from a poster child of the American dream – grew up in a railroad flat – 6 of us in a two bedroom rented apartment with one tiny kitchen and an even tinier bathroom; now living in more square feet than in some small principalities – jeezie peezie)..all that said, here’s my simple prescription for the fix:
    o – set up a “bad bank” for the legacy agency exposures – heck, the taxpayers are funding things anyway! Ring fence the toxic waste and work it off – btw – see Citi Holdings and how they are successfully “working” down their $300B+ of kitchen sink problem assets;
    o – lower the conforming limits dramatically so banks can and will lend long mortgage money, manage their resulting interest rate risk and be able to competitively price and portfolio new mortgage originations
    o – go retro and simplify the loan program offerings – do we really need interest only loans?
    o – go vanilla on the underwriting standards – people who cannot afford houses – well they cannot afford houses..American ingenuity was powered by legions of hard-working immigrants renting flats near their place of work – no dishonor there in my opinion
    o – blast Freddie and Fannie back to the 70s – simple model – follow the vanilla u/w standards and a conforming loan will earn the guaranty..get funky and the loan simply will not qualify
    o – convert the near foreclosure properties to real estate opportunities – in so doing, allow the families that could afford to rent their homes to stay in them with a shot at repurchasing them if/as their financial footings improve – get the loans off the back of the bank balance sheet and in the hands of professional investors and property managers..details are important for sure – but, trust me, this is workable
    o – and lastly, think carefully about accounting principles – I could argue both sides of the case regarding mark to market..if we demand fair value accounting for loans and bonds by the banks, then for pete’s sake allow the same discipline to count on the deposit side of the ledger..and if “forbearance” proves viable, even in a narrowly defined pool of troubled mortgages, there is ample history in the accounting standards to allocate that shifting basis into the financial statements over some appropriate time

    frankly, LD, these “prescriptions” could have been invoked in mid-2007 if we had any vision and leadership, and I’m pretty sure we would at least be turning the corner on sounder footings than we struggle with today..square footage – hmmm, not management of real problems – of that I am sure..what do you think?

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