The "Real" Trend in US Housing Prices...

Quote from the WSJ: "Underscoring the growing pessimism about housing, economists at Goldman Sachs in New York raised their forecast for the drop in U.S. home prices this year to 7% from a previous 5%. The forecast is based on the S&P/Case-Shiller national home-price index, considered the best such gauge by some housing economists. The Goldman economists expect a further 7% decline in house prices next year. In this year's second quarter, the index was down 3.2% from a year earlier.

Reggie's grassroots analysis:

The S&P index severely understates the glut in housing and the downward pressure on pricing. It uses

the repeat sales methodology which only includes houses have that have been sold at least twice, which excludes all new construction. So the homebuilder’s product which is being slashed in price with butcher knives and cleavers don’t even show up in the index, and these homes must be slashed enough to sell in a slow market that no longer has cheap credit, has much competition in excess supply, and no longer has the phantom appraisal pricing which helped sustain the bubble in the first place (more on this later).

The index also fails to include anything but single family detached and semi-detached housing, so coops and condos aren’t included in the mix. This means that areas like Manhattan and Brooklyn, South Miami and Las Vegas, DC and Cally are severely under counted. The mere act of excluding condos (the worst victim of boom time speculation) instantaneously makes things look a lot better than they are.

Also excluded are properties who experienced larger than median jumps in pricing, which where considered to be investor properties (benefiting from significant renovation in anticipation of resale). Investor properties constitute a very significant amount of the current prime and sub-prime defaults now.

Mentioned earlier was the push from appraisers eager to win new business. In the residential investment game, you (as in bank, mortgage banker, mortgage broker, real estate broker, investor, seller, and everyone in between) push the appraiser to come in with the highest value possible to allow you to a.) get the biggest loan possible, b.) obtain the most preferential pricing/terms (lower LTV) possible, c.) get as much from the sale as possible, or d.) all of the above. In the comparable valuation game, you pick comparables and adjust them for particulars to come up with a valuation. Once that inflated value is actually recorded in the city register, it's inflated value is used to further hyper-inflate other deals, and the upward spiral continues. The appraiser, in the boom times, picked the highest prices (which were inflated) to get a highest price (which itself was inflated) that is added into the records to make (guess what???) higher prices. Throw the petrochemical fuel of very cheap money and easy credit NINJA loans and it is easy to see how this housing boom was more than a boom, it was a speculative explosion in real asset prices that usually average 1%-3% a year in appreciation doing about 12%-100% in many places.

The caveat is, this works both ways. When the appraisers get busted for being too aggressive (and threatened with litigation and discipline - if you read the articles, they have been passing the buck saying they were pressured into inflating numbers) they start getting overly conservative and do the opposite. The banks also stop looking the other way since they may actually have to use their own money to fund/keep these loans instead of the OPM method of MBS/CDO fame. So now, the guys are looking for the lowest average prices in an attempt to be conservative, and the process reverses itself.

Now, we haven't even gotten to the commercial sector yet, where the real money is thrown around. Speculation and credit underwriting lite is coming home to roost in a sector near you.

Comments

[appraiserbill]

hey Reg, there are a lot of appraisers who did not chose to participate in the real estate run-up. You don't know how many times it was pointed out to lenders (all) that a particular sale, or sales program (read speculative) simply did not add up. Especially those of us who have the scars from the S&L fiasco.

[Bill Brown]

Spot-on analysis. Housing is an unfolding calamity. We will all pay the price of Greenspan's and Bernacke's "Easy Money Days" for years, and years to come.

[Reggie]

@appraiserbill:
Yeah, I know that there were some appraisers that did not go along with the game. Those were the ones that lost business to the one's that did. You upright guys look pretty good now. Some should be careful, after congress finishes grilling the rating agencies for their role in the CDO mess, the appraising agency just might be next. Congress will be unusually aggressive, after all, it's voting season.