Printer Friendly

eMail Article

January 04, 2008

A Reminder Concerning Popular Housing Indices
by Reggie Middleton

The National Association of Realtors released results stating sales actually rose .04% (statistically significant?), but were down 20% from last year with prices down across the board. The Times Online is reporting Shiller Says America could plunge into Japan-Style Recession.

"Losses arising from America's housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world's leading economists has told The Times.

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: "American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars' worth of losses."

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

"Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years," he said."

My take: I believe that my blog's readers are considerably above average in financial acumen and common sense. The NAR is simply not an entity to be taken too seriously, due to the obvious conflict of interest exemplified by their ex-economist, David Lereah, who published some of the most absurd BS I have ever seen come from a nationally reknown organization. Examples of his work from Wikipedia: Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade, And How to Profit From Them was published in February 2005 at just about the tippy top of the bubble (that takes some talent). One year later in February 2006, as the market is already on it's way down, Lereah retitled his book Why the Real Estate Boom Will Not Bust and mHow You Can Profit from It. Lereah's previous book The Rules for Growing Rich: Making Money in the New Information Economy touting investment in technology company equities was published in June 2000 at the onset of the collapse of the dot-com bubble. This extreme cheerleading has died down substantially, but the overly optimistic spin is still evident with their new economist, Lawrence Yun.

Mr. Shiller, is a different story, though. He is to be taken seriously and has no such conflicts that I can see. BUT (there always is a but, isn't there?), you should know what it is you are looking at when you stare at his numbers. In September of last year (Happy New Year, everybody) I cautioned about misreading the numbers from the Case-Shiller index (see The Real Trend in US Housing Prices...).

The Case Shiller index, although an econometric marvel (it is uncannily accurate for what it intends to do), does not capture the true essence of the housing downturn. It uses something called the "repeat sales methodology" for detached/semi-detached single family, owner occupied homes. This means that to be included in the index, the house would have had to be sold in an arm's length transaction more than once. It also takes pains to only include owner occupied detached/semi-detached homes. That excludes:

• new construction - hence all of the homebuilder's heavily discounted inventory sold is not counted,

• it excludes condos (where the biggest drops in price are to be found),

• it excluded multi-family units (those that thought rental income would save them),

• and it excludes investment properties and flips (again, where much of the damage is done).

Trust me, the Shiller index actually makes things look pretty compared to what is actualy going on out there. I use a proprietary guage that starts with the Shiller-based futures but adds back all of the stuff above (with a slight tweak for futures markets tend to overshoot the mark), and it has proven to be much more realistic. This is how I forecast values for the homebuilders and banks, see Ryland Group Summary Update for a summary example.

Reggie Middleton
http://boombustblog.com/

Reggie Middleton is the personification of the freethinking maverick--the penultimate nonconformist as it applies to macro strategies, investment, and analysis. He uses his background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation, and financial analysis to pursue, analyze, and capitalize on global macroeconomic opportunities.

Finding most available research lacking, both in quality and quantity, Mr. Middleton assembled his own talented research staff. As forensic research is a lynchpin for his own investing, "to actually put food on the table," he stands behind it as doing what it is supposed to do - illustrate, elucidate and educate.

He does not sell advice or research. He is an entrepreneur who exists outside of mainstream corporate America and Wall Street. This allows him the freedom to do things that many cannot--perform without conflicts of interest and corporate politics. He prides himself on developing some of the highest quality, actionable research available - regardless of price. He welcomes any and all to peruse his blog of freely available analysis, opinion and participatory social media; use his custom tools, download files, interact with the community and make critical comparisons from a results orientated perspective. Reggie believes ideas and implementations are improved and fine-tuned when bounced off of the collective intellect of the many, in lieu of that of the few - in essence, a form of collaborative open source financial analysis.

Visit his blog Boom Bust Blog.

Copyright © 2007-2008 Reggie Middleton

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »