The Not-So-Hidden Truth About Home Prices

David Leonhardt gives the business to a topic we have covered several times here: What is really going on with residential real estate prices?

"Based on the official housing statistics, you might have guessed that the sellers would have made out just fine, despite all the talk of a real estate slump. According to one widely followed real estate index — tabulated by the government agency that regulates Fannie Mae and Freddie Mac — the average house in Naples sold for 20 percent more this summer than it would have a year earlier.

But that wasn’t what happened at the auction. In fact, if you were at the beach club that Saturday, you could have been excused for thinking that the real estate market was crashing.

One three-bedroom ranch house with a pool sold for $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, sold for $880,000 at the auction., compared with $1.35 million a year earlier. On average, the houses that changed hands at the auction had fallen about 25 percent in value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the auction’s results.

Now, Naples is not a typical housing market. House prices nearly tripled in the first half of this decade, and speculators, who are more likely than residents to sell a house in a panic, flooded into the area in recent years. But with that said, Naples is not as unusual as you may think."

You may recall we looked at this auction, and its results, in a few linkfests in October.

The details of these ongoing pricing drops — and the misleading NAR reporting about it — are quite similar to our wn experiences. Our anecdotal story about that nice property in NY was rather similar. And as the Times column makes clear, its not just Naples:

"The truth is that the official numbers on house prices — the last refuge of soothing information about the real estate market on the coasts — are deeply misleading. Depending on which set you look at, you’ll see that prices have either continued to rise, albeit modestly, or have fallen slightly over the last year. But the statistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.

In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. The auction in Naples may have exaggerated the downturn in the market there, but not by much. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall."

In the sidebar, Leonhardt explains how the OFHEO housing stats paint a very false picture:

"Right now, all these [OFHEO] flaws seem to be making house values look much stronger than they really are. According to the latest index, for example, the average house in Miami would have sold for 22 percent more this summer than a year earlier. You won’t find many house sellers in Miami who would agree that’s true.

As Thomas Lawler, a housing economist (and no relation to Patrick Lawler), recently wrote in a report to clients, "Well, there’s a growing view that this index…doesn’t reflect what’s really going on with home prices." (emphaisis added)

The one saving grace of Residential Real Estate these days has been plummeting yields — the 10 Year has dropped from 5.25 down to 4.4% over the past 6 months. That has provided some cushion for non specualtive sale price across the country.   

The bottom line is that Housing Prices have already fallen dramatically, and are could still have more room to the downside — especially if the economy slows even further.

The Hidden Truth About Home Prices
David Leonhardt
NYTimes,  December 6, 2006

More on Housing Prices
David Leonhardt
NYTimes,  December 5, 2006

See also
More Borrowers With Risky Loans Are Falling Behind

Subprime Loans Going From Boon to Housing Bane

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Dec 6

    The same auctioneer in Naples is going to have another sale on Jan. 10. Though this time it will be an absolute (ie no reserve or minimum bid) teepee sale. This should give an even clearer picture of the Naples market in particular and investment real estate across the country.

    By the way, did anyone else read the other day Donald Trump has combatted slow lot sales in one of his developments by putting in a driving range? You know it’s a slow market when a development gets a driving range…

  2. My1 commented on Dec 6

    O’ Chief, I’m not too worried about Donald. He’s gone bankrupt a few times before. He knows how its done ;)

  3. Chief Tomahawk commented on Dec 6

    “O’ Chief, I’m not too worried about Donald. He’s gone bankrupt a few times before. He knows how its done ;)”

    You think he’d mind me driving my buffalo on his range???

  4. glenn_in_ma commented on Dec 6


    I’m in the NE and here’s what I’m seeing LATELY. After a full 6 months or more of virtually no homes being sold (at least along the routes I drive daily), over the last month I’ve noticed a flurry of selling activity. Noticed another “sale pending” sign this morning and one of my neighbors is apparently about to get his house (still way over-priced) under agreement soon. So there is no doubt in my mind, at least in my neck of the woods, that RE activity is picking-up again. How long it lasts is another issue of course. My guess is that a lot of folks who were waiting heard the market “bottom” calls and pounced to catch the bottom and also to get into a new house before year’s end. Interesting to see how this will play out.

  5. Aaron commented on Dec 6

    I’m moving to the LA area next month, so I’ve been following SoCal RE blogs. Check this one out, Centex is lowering prices as much as 20%. That doesn’t seem like confidence we’re near a bottom to me, seems more like “lets get the hell out of here”:

  6. russell120 commented on Dec 6

    Wake County North Carolina

    > Wake County Oct.2006 Job Growth 4.4% YOY (vs National 1.5%).

    > Estimated 2007 population growth 3%.

    > 2005 average residential property value $186,930.

    > 17% YOY percent increase in price reductions

    > 6.6% increase in inventory with 14,538 homes on market

    > 5.5% YOY increase in sales of existing homes.

    (via Dec 5, N & O)
    Research Enterprises told builders here that they expect to see some real, negative numbers in both new and home transactions as they compare to a year ago, during the next six months…We now have to wait for the market to find a way to absorb the excesses and imbalances, a large resale inventory, and a fairly large new home inventory, in a market short on buyers.

    So even in one the economically strongest parts of the countries with a growing population and very little price appreciation, Home Builders have managed to overbuild and are beginning to feel the pain.

    We are at the stage in the construction cycle where companies who are in slow down areas, and to have a revenue stream to survive, move into the areas that are booming and swamp those areas as well.

  7. ilsm commented on Dec 6

    Expensive at 60% these prices, still!

  8. Costa commented on Dec 6

    NY/LI area, people are starting to bring prices down and more for sales signs are going up. Prices are still pretty high

  9. number2son commented on Dec 6

    I believe the spring is going to be when the hard rain falls. The hypsters are taking advantage of the slow selling season to call a bottom, artificially inflate stock prices and squeeze the shorts. Even with rates at ridiculously low levels prices are keeping buyers away.

    Come spring, I expect inventories to swell like a tidal wave. That’s when the real “fun” begins.

    The smart long money will be gone when this happens.

  10. JoeyB commented on Dec 6

    What percent of homes sold in Naples are sold at auction (distressed)? I can’t imagine that this is a fair reflection of that market.

    I also imagine sub 6% mtg rates will be helpful all the way around.

  11. Michael C. commented on Dec 6

    So there is no doubt in my mind, at least in my neck of the woods, that RE activity is picking-up again.

    Not surprising since rates have been edging lower. The 30 year is now under 6% and today shows refi activity up 13.7% from a week ago.

    Also, the ADP employment indicator was stronger than expected. Why are people not losing jobs given that housing related jobs were such a large part of employment and the housing market is seemingly so weak?

  12. BKE commented on Dec 6

    The Barcelona real estate market has been red hot for ages. It’s reached the point where the median priced apartment (most people live in apartments called “pisos”, not homes) sells for 240,000 Euros; the median salary is around 1600 Euros/month.

    After a summer of dismal sales, prices look to be coming off their highs. I’m seeing places that were up for 240,000 Euros selling for 230k now.

    I suspect that’s Round 1 of the cuts. Salaries are stagnate and the ECB is hawkish.

  13. Estragon commented on Dec 6

    Michael C – “Why are people not losing jobs given that housing related jobs were such a large part of employment and the housing market is seemingly so weak?”

    I wonder if part of this might be explained by self-employed and “under-the-radar” real estate participants re-entering the formal workforce. Self-employed realtors, for example, likely wouldn’t be captured by ADP numbers until they have to take a more regular gig to pay the bills.

  14. winjr commented on Dec 6

    Estragon wrote:

    “I wonder if part of this might be explained by self-employed and “under-the-radar” real estate participants re-entering the formal workforce.”

    Yeah, good point. Also, housing completions are still near an historical high, as builders try to finish up as much work as possible:
    (courtesy Calculated Risk)

    When the completions rate falls, there *should* be a surge in weekly unemployment claims (which should build week to week as the illegals are first burnt off).

  15. donna commented on Dec 6

    “Just wait til the dollar drops a bit more and then home prices can go up again!”

    Ben “let’s fool the American people into thinking they’re rich again by devaluing the dollar” Bernake

  16. Cherry commented on Dec 6

    Nothing personally Micheal, but ADP’s “report” was overstated and based on seasonallity. Notice in the fall of 2000 the same thing happened. Useless.

    Activity is picking up? Nope it is not. December-March is going to be a hard hard lessen for some.

  17. Sherman McCoy commented on Dec 6

    Ought we to be surprised about the home price declines mentioned in Barry’s post? -17% to -35% in one year or a little more?

    I don’t think so. Don’t forget that INCREASES of this size over similar timeframes were typical over the few years up to 2005. Why shouldn’t they go down, especially the first year into the correction, with equal magnitude?

    Incidentally, I think the opinions that REALTORS have of the market are, by and large, the best estimate of how the market is doing. Not the REALTOR organizations- the individual “in the field” agents.

    Somebody should do a monthly poll with, say, 1000 REALTORs from across the country. Ask them via telephone to rate the market. And then make the findings public very quickly.

    It would be easy and cheap to do, great publicity for whomever does it, and it would probably provide the most accurate indicator of the current market conditions. And we’d see market changes very quickly incorporated into that indicator, making it very useful as a dynamic measure and not just a static one.

  18. DrCopper commented on Dec 6

    It is said that Doctor Copper has a Phd in Economics and
    its price shows growth or weakness in the world economy.

    Price chart of copper is showing strength.

    Copper just got a P&F Buy signal.

    I also remember that Buffet bought some drywall company
    a couple weeks ago lol. What does he see? hmmm

    I also notice that commercials are LONG Copper and
    have been buying on recent weakness.

    What the heck is happening….housing coming back?

  19. Spectator commented on Dec 6

    People in the industry will always call a bottom at at slightest excuse. And will typically be wrong.

    It was no different in the tech meltdown. I remember this quote from Scott McNealy in the face of many such “expert” calls that they see a bottom to the tech downturn.

    “The only bottom I see is that of my one year old when I change his diaper.”

  20. Cherry commented on Dec 6

    LOL Copper, you just made Spectator’s point. The only thing I see coming back is that you don’t have a Phd at all and Dr.Copper is a wannabe. Move on little man.

  21. Teddy commented on Dec 6

    Cherry, I like you a lot, in fact, I think you’re wonderful, but weren’t you a little harsh on the good Dr. Copper? As much as the financial engineers say we are now a knowledge based economy, let’s not sell Dr Copper short, not yet, anyway.

  22. JoeyB commented on Dec 6

    Who’s more scared right now…housing bulls or housing bears?

    It sounds like some in this space are committed to “love and marriage” in their position.

  23. Teddy commented on Dec 6

    JoeyB, who said anything about marriage? When it comes to stocks, ya gotta watch the tape, otherwise they’ll bite ya. You gotta be prepared to love um and leave um.

  24. JoeyB commented on Dec 6

    My point was that I see too much emotion in some poster’s “position”. The bears are CONVINCED that housing will bring on a recession. Ironically, this very issue may well be responsible for this overall market rally that many won’t accept as viable. Their thesis is based on an implosion in housing,and the consequent collapse in the economy. That position is a big gamble, imho.

  25. Teddy commented on Dec 6

    JoeyB, your point is well taken. There’s a big battle going on here. And if God help us,housing has taken over from GM as the number one factor determining our economy, and if China’s central bank and the Bank of Japan via the carry trade want to help Ben, like they helped Easy Al, then the army of debt peddlers by means of lower rates and loan standards could reverse this mess for a little longer.

  26. Cherry commented on Dec 6

    JoeyB, you are the one to be scared, things are happening with housing that simply represent a classic bust. Deal with that reality and move on. 2007 looks more and more as we go along, a recessionary year with 2008-9 being ugly conditions as the recovery commences(as the ‘recession’ is worst after the fact in the globalized era)

  27. Si commented on Dec 6

    tabulated by the government agency that regulates Fannie Mae……..Oh dear.

  28. my1ambition commented on Dec 6


    Yes actually Buffett DID up his stakes in USG – a housing builder – who’s stock has come under much pressure with the house-building slowdown. Carl Ichan on the other hand has been holding a short position for months.

    Buffett is going for the long term, which will eventually pick up. If it continues falling he’ll buy. Ichan on the other hand is just in for the short run.

    So, housing IS coming back. But Probably not in the next FEW months.

  29. Mark commented on Dec 6

    USG is the old US gypsum, they make acoustical tiles, sheetrock, etc, not houses; why it’s up? who the hell knows, there’s a host of reasons: buffett’s buying, asbestos litigation concerns are overdone and there’s takeover rumors. however take a look at ITB the homebuilder ETF, it’s up what 20%+ over the past 3 months? has housing bottomed? i seriously doubt it, more like shorting the homies is probably the most crowded trade out there-

  30. DrCopper commented on Dec 6


    I think I might have created the impression that I was
    pumping housing. I would not touch housing stocks.
    Just surprised with the rally in housing stocks.

    Next year there could be some nasty surprises:

    Dec. 6 (Bloomberg) — Stock sales by America’s corporate chieftains exceeded purchases last month by the widest margin since 1987, suggesting they don’t share the confidence of investors who sent the Standard & Poor’s 500 Index to a six-year high.

    Executives including Microsoft Corp.’s Bill Gates, Google Inc.’s Eric Schmidt and Kohl’s Corp.’s William Kellogg in aggregate sold $63.18 of shares for every $1 they bought in November, an analysis by Bloomberg of data from the Washington Service showed. That’s the highest since at least January 1987.

  31. my1ambition commented on Dec 7

    Hey DrCopper,
    You think there are chances of many companies like this going bankrupt if the going gets tough? Do they have inventory that can hurt them if they aren’t busy?

    …and wow on that Bloomberg piece.

  32. someguy commented on Dec 7

    Will someone please tell me how the MBS holders are making money when the mortgage defaults are climbing like crazy and there is tons of mortgage fraud out there.


  33. Gary commented on Dec 7

    Just saw a 40% off sign for Ryland homes in Vegas

  34. Juan de la O commented on Dec 8

    DrCopper may be said to have a Phd in economics but could be forgetting that markets can be inefficient and futures traded commodities prices need not, other than in theory, reflect real economy fundamentals.

    DrHG’s earlier ’06 run from ~225 to ~400 (and then down) may be a good example. So was DrCL’s.

  35. tew commented on Dec 14

    Can the writer confirm that the properties auctioned in Naples did not include existing liens / taxes? If they did, then the auction price *under*states the actual price paid. This is important.

    Also, one big problem with the OFHEO data is that it only includes conforming (Fannie / Freddie) loans (and excludes condos). I think conforming is now around $417k. So for markets where most non-condo homes are well above that, the OFHEO data are by definition a misleading subset of actual transactions.

    Finally, the data in a distressed market are distorted by excluding the “incentives” that sellers are throwing in. So the raw data are flawed (overstate prices) during a decline and bottom.

Read this next.

Posted Under