A Closer Look at Housing “Deceleration”

One of the issues I am constantly pushing back against are the spinmeisters who purposely falsify data, news or commentary to meet their agenda. At best, they ignore the obvious and spin the not so obvious. Many of the subjects I cover are a result of trying to clarify the bull$%# I read and hear elsewhere.

The latest source of nonsense courtesy of the sunshine crowd? The Q2 OFHEO report. I took particular issue with comments like "Home Prices Holding Up." That represents willful ignorance to me.

Consider this: The Office of Federal Housing Enterprise Oversight called the shift in home prices "the largest deceleration in 3 decades." Even the ususally demure director of OFHEO was quoted as saying "These data are a strong indication that the housing market is cooling in a very significant way." That’s quite a negative commentary — even more so when you consider it only covered Q2 (up to June 30 ’06). So we’ve have 2 more months of "Price Deceleration" since that data was assembled. Gee, I wonder if home prices somehow re-accelerated?

What makes the "Home Prices Holding Up" stuff such nonsense is that there isn’t a national market for homes; instead, we have a series of regional markets. Watch what happens to the "Prices Holding Up" meme when we dissect the real estate economy region by region:

"Prices of traditional single-family dwellings fell in 87 of the nation’s 379 major metropolitan areas from the first quarter to the second, the government reported yesterday, as the overall value of homes leveled off across the country.

On a quarterly basis, prices were lower in Boston, Sacramento, Pittsburgh and much of the Midwest, where the loss of manufacturing jobs has hit the housing market hard…

Price declines are spreading to more parts of the country. The 89 areas affected in the second quarter compares to 66 metropolitan areas where prices fell in the first three months of the year. In the fourth quarter last year, only 29 areas reported such declines."

For you students of the technical analysis, that is what we call a Trend.

Here’s a math quiz:  Fill in the blank:

29, 66, 89, ___

Anything in the 110-130 range gets you an "A." If you can explain why 150 is an acceptable answer, you get extra credit.

The question, by the way, is "How many metropolitan areas showed price deceleration in Q3 2006?" The math is pretty simple here: If this was a ECON 101 exam instead of math, you would see this question:

Increased inventory supply, and decreased demand = ?

The answer is "decreased prices."

That’s why  the Prices Holding Up stuff is utter fantasy. We discussed this a few weeks ago —  the way the data is assembled can give the appearance of stable prices: Why Don’t Big Housing Sales Drop Produce Big Price Drops?

Talk to any real estate agent you know personally — especially on either coast — and they will give you the straight dope as to traffic, sales and price reductions. I don’t believe prices are remotely holding up (just as I don’t believe Labor Costs have risen appreciably.

More later . . .


Home Prices Fall in Nearly One-Fourth of Metropolitan Regions
NYT, September 6, 20

OFHEO House Price Index Shows Largest Deceleration in Three Decades
Office of Federal Housing Enterprise Oversight (OFHEO), September 5, 2006

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What's been said:

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  1. James Bednar commented on Sep 7


    You can’t look at the OFHEO HPI numbers without keeping in mind the source dataset that they use to generate that index.


    6. What transactions are covered in the HPI?

    The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included. Conforming refers to a mortgage that both meets the underwriting guidelines of Fannie Mae or Freddie Mac and that does not exceed the conforming loan limit, a figure linked to an index published by the Federal Housing Finance Board. The conforming mortgage loan limit for single-family homes in 2006 is $417,000. Conventional means that the mortgages are neither insured nor guaranteed by the FHA, VA, or other federal government entities. Mortgages on properties financed by government-insured loans, such as FHA or VA mortgages, are excluded from the HPI, as are properties with mortgages whose principal amount exceeds the conforming loan limit. Mortgage transactions on condominiums, cooperatives, multi-unit properties, and planned unit developments are also excluded.

    Caveat Emptor!

  2. Uncle Jack commented on Sep 7

    37/29 = 1.2759

    1.2759 * 89 = 113

    To get 150 has to be due to momentum, and I only had time for the easy math.

  3. Larry Nusbaum commented on Sep 7

    “What makes the “Home Prices Holding Up” stuff such nonsense is that there isn’t a national market for homes; instead, we have a series of regional markets. Watch what happens to the “Prices Holding Up” meme when we dissect the real estate economy region by region:”


  4. je commented on Sep 7

    and they usually never talk about volume of sales or inventory….. they only talk about price which means nothing on light volume ……. just like any market , it’s not just price but volume as well

  5. Royce commented on Sep 7

    Barry, how are you working housing price deceleration into your inflation expectations?

  6. je commented on Sep 7

    Larry ,
    that’s exactly the point

  7. Larry Nusbaum commented on Sep 7

    The home builders (including condos) have been crushed because so many people who were looking to flip their positions (before they closed) have all gone away.

  8. Josh commented on Sep 7

    I think a good indicator for housing is the midwest. When prices are down & inventory up in a “non-bubble” area, you know trouble is coming.

  9. doh! commented on Sep 7

    Ahh Barry, it does not really matter what you and I believe but what the market believes, when it starts to believe it, and what happens to prices as a result. The pyschology has shifted, of that I am certain. Question, as always, is how to make money from this knowledge. Great blog. Good thinking and posting.

  10. Aaron commented on Sep 7

    2*9 = 18
    6*6 = 36
    8*9 = 72
    ?*? = 144

    Since an answer in the range given isn’t possible (I think), this must not be right, but the pattern sure is interesting…

  11. Barry Ritholtz commented on Sep 7

    Markets can be totally irrational only for so long — and that’s often longerr than you and I expect.

    I came into this week 92% cash — instead of short, only because I dont know how long the irrationality can last.

    Not for ever, and it appears likely not for very much longer . . .

  12. doh! commented on Sep 7

    “Not for ever, and it appears likely not for very much longer . . .”

    Now what I would find interesting is the “tells” you are watching and what you are looking for before putting some of that 92% cash to work (what is the 8% invested in?) Of course, if I were one of your hedge fund investors I would prefer you keep quiet on this so I understand if no answer is or will be forthcoming. Blame it on the lawyers. LOL.

  13. BB@ commented on Sep 7

    short high beta ETF’s vs. lower beta ETF’s

  14. fp commented on Sep 7

    Housing stocks … interesting here on HOV miss

  15. Bob_in_MA commented on Sep 7

    James is right, the key thing to remember in looking at these numbers is that you are looking at the cream of the crop mortgage-wise.There are lots of markets, especially in California, where the price of the home pretty much means you can’t get a conforming mortgage.

    The biggest trainwreck is going to be occur in the subprime and exotic end of things and the reprecussions for the non-agency MBS market are going to be severe. That market could well dry up quickly, just as Wall St is jumping in deeper. I’m betting that in a year Merrill Lynch’s recent move into the retail subprime market will be seen as the height of financial miscalculation.

  16. James Bednar commented on Sep 7

    The National Association of Realtors (NAR) finally concedes that home prices will fall.

    Home Sales Forecast Lowered, Prices To Dip Temporarily (PDF)

    Home sales during the rest of the year will be lower than earlier projections as the market works its way through an inventory and price imbalance, according to the National Association of Realtors®.

    David Lereah, NAR’s chief economist, said the most obvious effect in the near term will be with home prices. “A year ago we had record home sales and tight supply with buyers bidding over the asking price,” he said. “This year sales are slowing, homes are plentiful and sellers are negotiating. Under these conditions, we’ll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory.”

    “This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms,” Lereah said. “Keep in mind that over time, home prices rise at the rate of inflation plus one-to-two percentage points – buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned.”

    Caveat Emptor!
    Northern NJ Real Estate Bubble Blog

  17. Steve C commented on Sep 7

    Transaction prices in many areas may be holding up artificially since many realtors (especially in Cal.) are giving $ incentives to the buyer in order to keep the actual sales price elevated. This can on for only so long.

  18. advsys commented on Sep 7

    Thanks again for another valuable rant.

    I posted here months ago on the new home sales nos.
    Govt nos. did not jive with the home builders nos. Since the home builders have Sarbanes oxley as a tail wind, their nos. always seemed to be the ones to go with.

    Govt’s numbers had an absurd margin of error. (over 50%). Also a sign that manipulation was in the wind.

    Silly me, I still look forward to the parties to these frauds facing the music. Not likely is it. Very frustrating.

  19. M.Z. Forrest commented on Sep 7

    I’m not sure what to make of the midwest data considering that outside of Chicago, Mpls, and a handfull of other cities the area has been in decline for a good long while. Given the layoffs at GM and Ford, not to mention decelerating overtime pay, people’s incomes in the midwest are in decline. This is not to deny bubbles may exist in the Midwest. I just think we could be looking at a real decline in value while still in a bubble environment. It is simply amazing the amount of manufacturing in the Midwest tied to domestic auto sales in some way.

  20. Josh commented on Sep 7

    The problem with the Midwest is that the crowd/herd mentality understanding there is a bubble, is rushing to sell their houses, increasing the inventory, driving down prices.

    What I’m saying is the midwest data is more of a key to the national picture than just looking at the coasts.
    Beige book yesterday for Cleveland district said 3 of the largest builders have incresed their incentives, stopped building spec homes, are paying more for building materials, and laying off people. Though the people laid off probably aren’t really in the work force since they are either amish or illegal.

  21. eli commented on Sep 7

    Not sure about some of the mathematicians on here but the sequence given:

    29, 66, 89, n

    66-29 = 37
    89-66 = 23

    This sequence is slowing down.. not speeding up. So, I would guess n = 98 since 37-23=14 and 23-14=9 and 89+9=98. In the least, I would guess n<110.

    My most solid guess would be:


    ..based on 23/37 ~ .62 and (.62)*23 ~ 14 and 14 + 89 = 103. Having it change by a percentage of the last change makes sense since it'll keep the sequence from decreasing soon (which is what happens using the first method).

    Naturally, you could come up with more exotic formulas that would have the rate of increase decrease at first then begin increasing later. but, there's other work to be done so I leave that up to someone else.


  22. M.Z. Forrest commented on Sep 7

    I agree Josh, the national picture will behave similarly to the midwest. What I am cautioning is that the decline in real estate values may be rational action in an irrational market, not an irrational market coming back to equilibrium.

  23. sw commented on Sep 7

    Thanks for staying on this Barry – its a serious topic that the MSM is mostly not taking seriously. I’d also be interested to hear your thoughts on the effects the housing slowdown will have on inflation. It seems to me that given the huge effect of increasing housing wealth on consumer activitiy and debt that deflation will be the next big worry.

  24. anon commented on Sep 7

    Harmonic mean : n ~ 151
    Geometric mean : n ~ 156

  25. Alex commented on Sep 7

    I’m curious what this board thinks about the following logic: we commonly say here in Oregon that prices in Bend and Portland won’t go down because California is so large, and prices so high relative to us. However, if prices drop in California, won’t sellers there be much more reluctant to sell, bringing less rollover money, and less liquidity to the Oregon market? So, if not national, there could be at least inter-state influences of real estate markets.

  26. Jim Bergsten commented on Sep 7

    Think “outside the box” folks — this “math quiz” shows why quant investing doesn’t work.

    The sequence is actually Barry’s bowling scores. Don’t laugh — he hasn’t been bowling for long, and going from 29 (with bumpers, no less) to 150 in only four games is no mean feat!

  27. Skoobz commented on Sep 7

    Alex: you likely won’t be spared. that’s the “it won’t happen to me” logic. When tech stocks crashed, so did almost every stock. same will likely happen with real estate. very, very, very, specialized real estate might avoid the slaughter (weird things like nursing homes in san antonio – not a prediction, just an example of wierdness), but i doubt oregon communities will be saved because of their price relative to california.

  28. Alex commented on Sep 7

    Thanks o-o-o but I’m not sure you read my post. I was making a specific argument why the “it won’t happen to me” might not be true. (if by “me” you mean “them” since I don’t own any real estate)

  29. eli commented on Sep 7

    I found this sequence using superseeker@research.att.com:


    It’s sequence A054750 and is describe like so:

    Smallest prime number whose digits sum to n-th prime.
    a(7)=89 because 8+9=17 and 17 is the 7th prime.

    Mainly, 89 is a prime number and the sum of its digits equals the 7th prime. 199 is a prime number and 1+9+9=19 which is the 8th prime number.

    I know that our sequence is supposed to be:

    29 66 89

    but I figure that someone screwed up and missed a declining market in the 1st quarter.

    This suggests that we are looking at around 199 declining markets for 3rd quarter. This is exciting, though highly improbable (I’m guessing).

    Does that get me an A++?

  30. Bob_in_MA commented on Sep 7


    Things are similar where I am in western Mass. The high end is definitely driven by people who can relocate selling their Boston area modest ranch for $800,000 and coming here and buying a beautiful victorian for $600,000. I guess it depends on how much prices fall in the Boston area, where they are already falling. The high-end here is completely disconnected to the local job scene. I wouldn’t look for migration to necessarily support prices that would otherwise fall.

  31. teddy commented on Sep 7

    If housing is a huge part of the current economy, I would suspect that long term interest rates would go DOWN and bonds to rally with this “weakness” in housing which would support the homies. And didn’t Congress cover Fannie’s behind a couple of weeks ago? So isn’t it ok for the mortgage brokers to continue to originate and for bankers to hold negative amortization loans as performing loans? And if the stock market starts to rally here, shouldn’t we be hearing from “ss” soon.

  32. T commented on Sep 7

    (Apologizies if someone covered this, but I haven’t found it in the comments.)

    You get to 150 based on the compounded /growth/ rate from 29 to 89. There’s a reasonable argument that this is a compounding phenomena — the worse the market gets in a wider number of areas, the more areas will be pulled down by what is increasingly a nationwide phenomena (note this is a very bounded phenomena given the finite sample set.)

    89/29 = 3.1
    Square root of 3.1 = 1.75 (75% increase per unit time)
    89 * 1.75 = 156

    Tremendous noise of course — the middle data point is definitely NOT on the curve that takes you to 150.

  33. MDDwave commented on Sep 7

    For the sequence
    and logarithmic regression, the equation would be
    y = 54.481Ln(x) + 28.794
    For 4, the result would be 104.3

  34. rex commented on Sep 7

    Here’s a great example of what Barry’s talking about from some guy named Tom on bizzyblog, who argues that the OFHEO numbers merely mean that:
    “Home-Price Growth Returning to Normal”
    As I replied on bizzyblog:
    If Tom had had his way, I suppose we’d have seen lots of headlines in 2001 saying: The Nasdaq hasn’t been in a bubble; it’s just returning to normal!!!!
    Or this one in 1638: “Don’t worry about losing your life savings!!! Tulip prices are just returning to normal!”

  35. Robert Ben Kline commented on Sep 7

    Well I came up with 103, just like Eli in his earlier posting, his later 199 does make more sense.
    Somebody remind me. When in the late 80’s (I’m so last century), did the housing cycle look like this? I remember, in the early 90’s (maybe someone can give me that year too!), the remaining units inTrump towers of West Palm Beach were auctioned off. Did that penthouse go for $90k? I saw it. elevator keyed to your floor, green marble wall in your hall way, spacious rooms, and great view. Probably over $1M today. Weston (west of Ft. Lauderdale) was almost a gost town – looks great today. I didn’t get those, but I did buy some bargain houses after I saw that. Did the bottom come after 3 or was it 5 years?

  36. juan commented on Sep 7

    Thanks all, excellect posts.

    Perhaps very wrong, but I’ve a sense that a fair amount of the following has been taking place and will use two relatives as examples.

    My brother purchased a house in LA ~9 years ago, sold last year for a double and used approx. 60% of that return to purchase a larger house in Montana. Free and clear, 17 acres, trout, etc.

    My daughter also purchased in LA, somewhat more than a doubling, sold early this year and purchased a small house, cabinas, restaurant combo in Costa Rica, though for more than I think it’s worth and not without debt.

    No doubt that the markets are local but the asset inflation has also been interstate and international…should be a very nasty unwinding.

  37. whipsaw commented on Sep 7

    per Juan:
    “No doubt that the markets are local but the asset inflation has also been interstate and international…should be a very nasty unwinding.”

    Until a couple of months ago, I was firmly convinced that we were heading into stagflation (or perhaps we were in it at that time, who knows?). But I am coming over to the deflationists’ camp now.

    I say that because I am starting to think that what BR and many others including me read as rampaging inflation was actually the tipping point for deflation (and I don’t mean disinflation, I mean flat out deflation). I can’t quote Richard Russell directly without violating my subscription agreement, but would summarize some of his views over the past several months as believing that deflation is the real threat, the US must inflate or die, and globalization (what I call the use of slave and coolie labor- RR has never said that) has led to the production of far too much stuff for the world to absorb, so prices for “things” must fall.

    Then again, RR is a goldbug as much as a Dow Theorist and his investment objectives at age 82 are not much like mine at 54. But his basic notions have been pretty much on the mark for over 50 years now and you have to respect them in any case.

    Anyway, if your relatives managed to score in a crazy bubble market that was created to mask the collapse of an equally crazy bubble when it collapsed, then I would say that they should just go to bed chanting “Only in America and I hope not here.”

  38. win commented on Sep 7

    JOE ——–

    after Thursday’s closing bell said it plans to exit homebuilding in Florida, resulting a reduction in its workforce. In connection with the plan, St. Joe said it expects to take a charge to earnings of about $10.7 million. The charge consists of about $2.3 million for one-time, cash termination benefits to employees and $8.4 million of non-cash charges related to the write-off of capitalized homebuilding costs at several communities. About $9 million of the charges will be recognized in the third quarter, the Jacksonville, Fla.-based real estate operating company said

  39. Pacesetter Mortgage Blog commented on Sep 8

    “Stated Income” Mortgage Loans helped create the Housing Bubble

    Mortgage Blog News – There is still a lot of talk going around regarding the after shocks of the Housing Bubble. The crazy run up in values that were experienced last year, in many parts of the country, along with

  40. ceo commented on Sep 8

    Irish Mania for Homeownership Squeezes Consumers as Rates Rise

    By Dara Doyle

    Sept. 5 (Bloomberg) — Ken McKenzie, a university researcher in Dublin, is shelving his overseas holiday plans this year. He blames the European Central Bank for keeping him at home.

    “I had been thinking about Istanbul, Stockholm or maybe Canada,” says McKenzie, 30, who now spends 38 percent of his 2,500-euro ($3,215) monthly salary to pay an adjustable-rate mortgage. “But with rates going up? Forget about it.”

    In Ireland, where almost eight in 10 dwellings are owner- occupied, the frenzy for property is forcing many buyers to scrimp after prices quadrupled in a decade. The Irish central bank is concerned about a potential collapse as interest rates rise, pushing debt costs higher. That may leave western Europe’s fastest-growing economy vulnerable to a slowdown.

    “There’s a sense of a bubble,” says Alan Barrett, senior economist at Dublin’s Economic and Social Research Institute. “One in eight workers are in construction. If there’s a wobble, it gives you the potential for a big unemployment increase.”

  41. db commented on Sep 10

    The Canaberra Times from Australia

    “Established house prices could fall by about $100,000 if there were large-scale land releases, the author of a study on housing affordability widely quoted by government ministers has estimated. ‘Canberra is down there in the middle of a desert,’ Alan Moran said. ‘[There is] a lot of land around there and the land is worth around $10,000 a hectare. You get 10 blocks per hectare. It should be about $1000 a block.’”

  42. JGarcia commented on Sep 17

    That’s easy for you to say!

    Care to translate?

  43. Snyder commented on Sep 20

    Does anyone know of a good article about the anatomy of a real estate crash? I’m not looking for some half-baked speculations complete with point-and-figure charts to help me trade the homebuilder stocks. Instead, I’m looking for a good historical, fundamental analysis. Suggestions, anyone?

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