S&P/Case-Shiller Home Price Index: Composite 20 SA, Jan-00=100
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To start, I want to show the seasonally adjusted Case‐Shiller HPI. The series reached its peak in May‐06. For the uninitiated, the Case‐Shiller HPI is an index that “measures changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.” Also, “to be eligible for inclusion in the index, a house must be a single‐family dwelling. Condominiums and co‐ops are specifically excluded. Houses included in the index must also have two or more recorded arms‐length sale transactions. As a result, new construction is excluded.” Finally, “the index uses the ‘repeat sales method’ of index calculation – which uses data on properties that have sold at least twice in order to capture the true appreciated value of each specific sales unit.” So new homes & condos are excluded. This is a look at repeat sales, with some controls around product mix. But as those homes change hands, the index’s composition will change over time. But while everyone looks at the index levels and sees an uptick – which is positive – there’s something else that makes a market and that’s transaction volume. The next slide looks at that.
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S&P/Case-Shiller Home Price Index: Composite 20: Sales Pair Count NSA, Uni ts
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This chart looks at the count of sales pairs, which is defined as “the number of observations used in calculating the S&P/Case‐Shiller Home Price Indexes. A sale pair is comprised of two arms‐length transaction prices for a specific home at two distinct points in time.” So in essence, it’s a look at market breadth/depth. It is not seasonally adjusted, and I wanted to present it that way here to illustrate a couple of points: •The peak in the series was hit in Aug‐05 with 185,773 sales pairs for the month. Prices in the seasonally adjusted series peaked almost a year later (May‐06). We are at 50% of that volume. •If seasonal trends hold, next month will be the high‐water mark for the year in terms of transactions. Also, note the channel that appears to have formed starting at Feb‐08. We may be seeing a normalization in the volume of housing transactions. If you want to take out the seasonal trend, a moving average (in this case, a 12 month MA) will take out the seasonal trends and give you a look at the underlying trend. I did that in the next slide.
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S&P/Case-Shiller Home Price Index: Composite 20: Sales Pair Count 12-m onth M ovingAverage
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Here, the 12 mth MA presents a smoothed trend line for the sales pair count. The 12 mth MA flattened out 6 months after the Feb‐08 trough that formed, but has remained flat ever since. So I wouldn’t classify this as a typical bottoming process, but as one where we can find a level of equlibrium. Now the question is this: let’s take the HPI and apply the same technique. What does it tell us?
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S&P/Case-Shiller Home Price Index: Composite 20 12-m o nth M ovi ngAverage
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140 05 06 07 08 Source: S&P, Fiserv, and MacroMarkets LLC /Haver Analytics
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Here, it shows that we’re still in a downtrend based on the 12 mth MA. The MA peaks around Jan‐07, 8 months after the index did. If the same price and volume trends hold, we may see the decline level out early next year around ’03 levels. But that assumes the following things: •The $8,000 new homebuyer tax credit had no correlation with the sales pairs used here. If the majority of new homeowners bought a new house, the relationship between the two factors would be spurious, at best. •Shadow inventory comes back into market at a trickle. If we see a cascade of inventory back onto the market, some of these trends that I’ve tried to outline here may not hold. Personally, I’m not sure the two assumptions I mentioned above will hold. Looking at the latest OCC/OTS Mortgage Metrics report, you get the sense we’re running out of fingers to put in the dike. If that’s true, expect to see house prices head lower, even if volume has normalized at the current levels we’re seeing.
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