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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.

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