Looking beyond inventory and sales: A deeper understanding of current housing market conditions

by Dan Krell © 2012

Housing Statistics

According to the National Association of Realtors® news release of February 9th, home affordability has increased in the last quarter of 2011 in many metro areas- including the metropolitan Washington DC region. The increase of home affordability is attributed to “softer existing-home prices and record-low mortgage interest rates in the fourth quarter.” The Washington DC region home affordability increased in the last quarter about 5.8% while the region’s home prices for existing homes fell about 5.4% (realtor.org).

Details of the NAR’s fourth quarter market analysis include a continued interest in home ownership among first time home buyers, as 33% of home purchases in the fourth quarter of 2011 were by first time home buyers. Additionally, 29% of the homes purchased in fourth quarter were “all-cash purchases,” which has been relatively unchanged; however, the percentage of “all-cash” real investor purchases was 19% (down from 20% realized in the third quarter).

Greater housing affordability may sound promising, however having more meaningful information may help understand what’s happening in the housing market.

To get a clearer understanding of the housing market, you might consider the February 10th speech given by Federal Reserve Chairman, Ben Bernanke, to the National Association of Home Builders entitled, “Housing Markets In Transistion” (federalreserve.gov). The overview of the housing market was explained as an imbalance in the supply and demand. Supply in the housing market, as Dr. Bernanke described it, greatly exceeded demand in the last few years. Demand for housing, as measured by home vacancy, has considerably decreased; home vacancy is “dramatically” elevated from the number of vacant homes in the first half of the 2000’s. Additionally, a high foreclosure rate is likely to continue; which would not only increase the number of vacant homes, but negatively affect families and communities as well.

Adding to the imbalance is the strengthening of the rental market, which evidently has increased demand.

Housing Statistics

Dr. Bernanke also described the problems in the housing market as a secondary issue that stems from more pressing economic concerns, such as employment and household formation. Economic uncertainty has impacted the willingness to commit to home ownership. “…housing may no longer be viewed as the secure investment it once was thought to be…”

A stifled housing market has also held back an overall economic recovery. Dr. Bernanke stated that home equity has been reduced about 50% from the housing peak; more than $7 Trillion of equity has been lost which resulted in a decrease of household spending of “$3 to $5 per year for every $100 of housing lost” (which is estimated to be about $200 Billion to $375 Billion per year). Besides the reduced consumer spending, low/negative equity creates other problems for home owners too; such as: restricting the ability to refinance to lower interest rates; reducing or eliminating the ability to cash out home equity for emergency expenses; and possibly preventing a move due to an underwater mortgage.

Dr. Bernanke was clear when stating that housing problems have far-reaching effects on home owners, communities, the financial system, and “the vitality of the economy as a whole.” He continued to state, “…This observation underscores the importance of efforts to improve the condition of the housing market.” He is not the first to say that there is no single solution; however, he is one of the few who has been able to articulate the interconnected factors that need to be addressed.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published Using this article without permission is a violation of copyright laws.

By Dan Krell.
Copyright © 2012

Understanding the revision of home sale statistics

by Dan Krell
© 2011
DanKrell.com

As the housing market slid, the National Association of Realtors® (NAR) was often criticized for producing home sale data that seemed unrealistic. As criticism seemed to peek, NAR announced earlier this year that they were seeking to “re-benchmark” data for counting the number of homes that sold.

According to a December 13th Reuters report (Existing home sales to be revised down from 2007: NAR), the NAR is “revising down” home sales statistics because of double counting, “indicating a much weaker housing market than previously thought.” The news sparked cries of “fraud!’ and “told you so’s” across the blogosphere; while some used the news as a marketing opportunity to tout their data as unwavering.

However, according to the NAR’s press release, “Q&A on Re-Benchmarking of Home Sales” (economistsoutlook.blogs.realtor.org), the main reason for the re-benchmarking is for data drift that occurred during the housing downturn; re-benchmarking is a common aspect of estimating economic data (much like the government’s GDP and employment figure revisions). The re-benchmarking is only for existing home sales and not home prices.

According to Lawrence Yun, NAR Chief Economist, data drift is to blame for the over estimates. The monthly existing home sales data that is reported by NAR is compiled from MLS boards across the country. Data drift was revealed when comparisons were made with other available home sales data.

Data drift is a term that describes the change of non-constant variables used in statistical measurements. The data drift in NAR’s existing home sale data was described as being caused by several factors: an increasing reliance on Realtors®, double listings, and inconsistencies across MLS boards.

Although MLS data typically tracks Realtor® home sales data, there are homes that are also sold by home builders and for-sale-by owners (fsbo) which are not typically reflected in the MLS. Dr. Yun believes that some of the data drift is due to the increasing reliance on Realtors® as the market deteriorated to sell homes they typically did not sell in the past (by fsbo’s and builders).

Additionally, it was realized that MLS home sale data was duplicated in some instances. In some regions, it is not unusual for Realtors® to belong to more than one MLS board. In some of those instances, Realtors® often input the data in two or more MLS’s; thus resulting in a duplicate sales.

As technology and markets advance, local and regional MLS boards found themselves changing to increase the quality of the MLS data, as well as expanding to provide service in outlying areas. Although many MLS boards attempt to adhere to consistent data standards and practices, compiled home sale data is not always consistent across all the MLS boards. Additionally, as MLS coverage grew, it could have been logically assumed that the quantity of home sales reported for the growing MLS boards would increase because of the wider coverage.

Additionally, Dr. Yun stated that the census data used to benchmark the MLS data has also changed; the U.S. Census changed the data it collected by changing survey forms. In re-benchmarking, the NAR expects a revision of existing home sales to account for the increase of MLS entries of new homes as well as homes that sold multiple times within a 12-month period (flips). The re-benchmarking should also account for fsbo variances that were not previously adjusted.

The revisions are expected this week.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 19, 2011. Using this article without permission is a violation of copyright laws. Copyright © 2011 Dan Krell.

Has the market hit bottom yet?

I have to admit that after offering definitively optimistic analyses about the housing market after the meltdown, I now answer housing market questions tentatively. The tentative answer is not for a lack of optimism (the local market has shown strength in the last year where other regions continue to languish at best); however current analyses are tentative because rather than making a decision to buy or sell a home strictly on the strength of the market, consumers also need to be aware of personal goals and preferences.

Sure, if you look at some of the housing market indicators, such as the S&P/Case Shiller Home Price Index and the National Association of Realtors® (NAR) existing home sale report, national data are conflicting and may not yet indicate a solid recovery (although the Washington, D.C. regional data has shown strength).

The last S&P/Case-Shiller Home Price Index (standardandpoors.com) data that was released March 29th indicated that national home prices have not fared well for January 2011. However, it must be pointed out that as home prices slid across most of the country, the Washington, D.C. region’s home prices revealed an annual increase of 3.6%.

The NAR’s February existing home sale report released March 21st indicated a further decline for the number of homes that sold compared to the same time the previous year. However, the Washington, D.C. region was reported to have increased in home sales but decreased in home prices compared to the same time the previous year. We are anxiously waiting for this month’s report, which is scheduled to be released this week (realtor.org).

Additionally, the April NAHB/Wells Fargo Home Market Index (HMI) fell to 16; as reported in the April 18th press release by the National Association of Home Builders (nahb.org). The HMI is a scale from 0 to 100 that rates builder sentiment across the country (the lowest index reported was 9 in 2009; the highest index was 77 reported in the late 1990’s). NAHB Chairman Bob Nielsen was reported as saying in the press release, “While builders in some areas are starting to see a pickup in traffic of prospective home buyers, many consumers remain skittish about the health of the housing market and overall economy, particularly in view of recent legislative and regulatory proposals that could make it much harder to get a mortgage…”

Economists and other housing experts remain conflicted about sources for the continued issues facing the national housing market. Some point to continued problems with distressed home sales, which include foreclosures and short sales; while others continue to point to unemployment. The reality is that these economic factors are just a part of a larger puzzle. Other economic forces that can affect consumer sentiment and the housing market can range from mortgage regulation (as recognized by Bob Neilson of the NAHB) all the way to energy shocks and policy (one of Shell’s energy scenarios named “Scramble” predicts major global economic difficulties as early as 2020 unless serious energy policies are undertaken).

Has the housing market bottomed out? Macro-economic factors may indicate that housing could continue to manifest symptoms of a labile global economy; while micro-economic factors might indicate a completely different picture. For someone contemplating buying or selling a home, the answer is probably more of a personal reflection combined with local and hyper-local housing data.

By Dan Krell Copyright © 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.