Tuesday, September 05, 2006

OFHEO: House Price Appreciation Slows, OFHEO House Price Index Shows Largest Deceleration

The Office of Federal Housing Enterprise Oversight (OFHEO) released its 2Q 2006 Housing Price Index (HPI) (pdf) report. The headlines were "House Price Appreciation Slows, OFHEO House Price Index Shows Largest Deceleration"

U.S. home prices continued to rise in the second quarter of this year but the rate of increase fell sharply. Home prices were 10.06 percent higher in the second quarter of 2006 than they were one year earlier. Appreciation for the most recent quarter was 1.17 percent, or an annualized rate of 4.68 percent. The quarterly rate reflects a sharp decline of more than one percentage point from the previous quarter and is the lowest rate of appreciation since the fourth quarter of 1999. The decline in the quarterly rate over the past year is the sharpest since the beginning of OFHEO’s House Price Index (HPI) in 1975. The figures were released today by OFHEO Director James B. Lockhart, as part of the HPI, a quarterly report analyzing housing price appreciation trends.

“These data are a strong indication that the housing market is cooling in a very significant way,” said Lockhart. “Indeed, the deceleration appears in almost every region of the country.




This report is a lagging indicator. Please post your own findings in the comments section.

32 comments:

  1. From CNN/Money:

    Sharp home price pullback

    OFHEO's numbers are generally regarded as the most accurate gauge of housing prices. Instead of measuring the average sale prices of homes, it compares repeat sale prices of the same single family homes.

    Even so, according to Jonathan Miller of Miller Samuel, an appraiser in New York, the slowdown may be even more pronounced than the numbers are showing.

    "The index may not reflect what's really happening out there," he said.

    Miller thinks that many sellers are holding out for unrealistically high asking prices, and the buyers actually purchasing homes are only the ones willing to pay those higher prices. "That's why there's been such a drop-off in volume," says Miller.

    In a normal market those sellers would more readily accept lower bids but, conditioned to oversized price increases, they are reluctant to abandon their asking prices.

    To close deals with the on-the-fence or reluctant buyers, sellers will have to drop their prices and only then will the index reflect the actual market. The effect could snowball if sellers get a bit panicky and try to unload their properties quickly, before prices erode further.

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  2. His use of the term "panic" is very unsettling. Trouble is, it is part of the pattern in nearly all speculative manias. Price increases at the very end are marked with hysteria - we saw that in late '04.

    A brief "leveling off" period is typically followed by orderly price declines. We are seeing that now.

    If the historical model holds, at some point, investors will panic. That is "the bang" that Galbraith refers to. We shall see.

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  3. dc_too said:
    "If the historical model holds, at some point, investors will panic. That is "the bang" that Galbraith refers to. We shall see."

    Your theory presupposes that everyone buying/selling is an investor. What happens where at least 4 out of 5 transactions are for "consumption" and not "investment"? It just doesn't seem possible that everyone will suddenly be selling their homes and planning on moving into camp grounds or the like.

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  4. "If the historical model holds, at some point, investors will panic. That is "the bang" that Galbraith refers to."

    An orderly study of bubbles shows that they do not always end the way bubbleheads here are hoping. An FDIC study concludes that only 17% of housing "booms" are followed by a "bust."

    Yeah I know, this doesn't fit the bubblehead simplistic creed that housing prices will fall as fast as they rose. Unfortunately there's evidence disproving this simplistic creed.

    http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi.html

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  5. I wonder how they "tweeked" these #'s considering they delayed it a month.


    http://yochicago.com/forums/forumdisplay.php?f=746

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  6. all i know is that, out here in socal, when people end up upside down on their homes they walk away.

    been there, seen that, that is the mentality out here and i suspect that will happen again. once that does happen money in the RE business gets real tight and you actually have to prove (unlike now) you can pay the money back.


    as i just heard on the radio "5.99% up to 1 million dollars with no income verification"


    people can still get $1,000,000 without being able to prove they can pay it back, to me that is insanity.......and SCREAMS of troubled waters ahead.

    anybody who buys into this market is in serious danger of financial ruin.

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  7. Please note, these numbers do not include all of the "creative" incentives being used to sell hosues and (more so) condos over the period. Timeshares and cars for the buyer/agent, "free" plasma TVs and kitchen upgrades, etc... Plus the more traditional "pay closing costs" gimme.

    At least in the DC metro area, these would easily be more than the so called "appreciation" number. Right now sellers are gimmicking a price decrease by selling high and giving some of the money back in all of these "off books" transactions. Which is exactly why they are doing it this way...to protect the comps.

    It should be interesting to see what happens over the rest of the year.

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  8. "It just doesn't seem possible that everyone will suddenly be selling their homes...."

    "Everyone" is not required to move the market. Markets are moved by the buyer and seller at the margin. As volume dries up in some neighborhoods an agent with a new listing may have only one or two comps in the last several weeks to base the price on. In an illiquid market such as residential real estate sometimes a single buyer and a single seller can establish a new comp that serves as the foundation for prices for weeks or months to follow.

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  9. "An orderly study of bubbles shows that they do not always end the way bubbleheads here are hoping. An FDIC study concludes that only 17% of housing "booms" are followed by a "bust."

    Hipanonymous, are you saying we are in a real estate bubble right now? Goodness me! All bubbles pop, for Heaven's sake.

    And not all "booms" qualify as full-on bubble manias, either. I assure you that any study of bubbles or speculative manias will demonstrate that they end in panic.

    So if there is no bubble, no mania, no widespread, popular attention or participation, fueled by "innovative financing" in the current "boom," then relax. You've nothing to worry about.

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  10. OFHEO data only pertain to Fannie and Freddie conforming mortgages of $417k or less. These numbers omit a sizable chunk of the market.

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  11. The definition of a "bust" from the FDIC study quoted by Hypo above:

    "Because prices are sticky downward, it will be necessary to define a price bust using a lower threshold and a longer time period, such as a real price decline of 15 percent or more in five years."

    If THAT is the definition of a bust, then I can buy into that. I would see most of the decline coming from inflation having eroded the price. (I.e., If nominal prices went up 10% in one year, but inflation was 15%, then there would have been a real loss of 5% ... and over 5 years it is easy for that to happen in a period of inflation.) However, one current homeowners with mortgages wouldn't be hurt since their payments are locked in at nominal dollars. Also, this isn't anywhere close to the "real" depreciation I've heard bubbleheads saying they expect. I'm curious to know, do bubbleheads buy in to this definition? ... and does that make me a bubblehead since I can accept this as what will happen?

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  12. Lance wrote: What happens where at least 4 out of 5 transactions are for "consumption" and not "investment"?

    Not enough. In the 1980's, Boston home prices declined 50% despite 2/3rds of the homes listed being pulled off the market. Home prices are set by transaction prices. Since insufficient transactions are occuring, prices will drop to increase the volume.

    It doesn't matter if you believe people are going to be upside down with the option ARMs or not...

    The market is progressing as many predicted. The next few weeks will initiate the "Labor day masacre." In any market with summer rentals... expect a high percentage of those units to show up in the MLS.

    Homes will return to reasonable multiples of median wages. 6X to 8X in "nice cities," 3X in non-land constrained areas.

    Due to the *huge* quantity of jobs I see leaving my bubble area, I have no doubt that those bubble areas that reached 10X median income will drop to 5X median income. The only question is how fast.

    I cannot possibly be the only person who knows friends who *will* lose their homes in the next 24 months. If I am... I feel for your friends as you haven't been listening to them.

    Neil

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  13. @ Lance

    "Your theory presupposes that everyone buying/selling is an investor. What happens where at least 4 out of 5 transactions are for "consumption" and not "investment"? It just doesn't seem possible that everyone will suddenly be selling their homes and planning on moving into camp grounds or the like."

    ARM and IO financing off the short end of the curve became popular because it resulted in the cheapest payment. Investors and owner occupants took advantage of extraordinarily low payments that inflated prices. What's going on now is that higher rates and higher prices have eliminated ~40% of buyers (the investors). Those "investors" bought for capital appreciation, not to be landlords. Those who were formerly investment buyers are trying to get out from under the payment rock, as are some owner occupants who are discovering they bit off more than they can chew as rates on ARMs reset.

    So, my hypothesis is that the buyer pool has been diminished dramatically due to higher rates and prices, yet the seller pool has expanded for the reasons mentioned above. I'm hearing a lot of anecdotal evidence locally that we're at a dramatic tipping point.

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  14. As I suspected ...

    "Today's OFHEO report said housing price growth "declined rather dramatically" in states, such as Arizona and Florida, where prices have shown the greatest appreciation. In Arizona, home prices jumped 24 percent during the past year, but they grew only 2.9 percent in the second quarter.

    In the Washington region, home prices rose well above the national average -- 16.2 percent in Maryland, 15.9 percent in the District and 14.2 percent in Virginia -- in the year ended June 30."

    www.washingtonpost.com/wp-dyn/content/article/2006/09/05/AR2006090500466.html

    We have the fundamentals here. And Neil, those people you talked about knowing having left your area? Were they on their way here by any chance?

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  15. "We have the fundamentals here." And don't forget the embassies; SES's; GS-15/Step 10's; First year, $750K associates at the Arnold and Porter etc. that Lance sees gobbling up those 52,000 condos coming online.

    You can't spell fundamental without 'mental.' Or 'fun'!

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  16. i sure hope Lance is here next year!!!!

    Lance promise us you won't leave okay???

    don't worry i won't gloat when the bubbleheads are proven right but i'll wanna get your spin on how you'll explain what we all knew and you wouldn't believe!!

    :lol:

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  17. Lance wrote: We have the fundamentals here. And Neil, those people you talked about knowing having left your area? Were they on their way here by any chance?

    Actually, we're pulling from jobs from DC, just not very quickly. Pheonix, Dallas, Austin, and some other operations are gaining. The 30 and 40 somethings who are not homeowners want to live where they can buy affordably. The "near retires" want to cash out... Now! They're quite happy to relocate for retirement.

    Do I expect DC to do better than many other bubble areas this Christmas into 1Q2007? Yes. I believe DC is lagging the other markets by 6 months. What matters is housing cost normalized to median income. Due to the highly transient nature of the US population, that is the #1 way to determine the stability of the housing market. Yes, job growth/loss create transient effects. What is the price of DC real estate to the median salary?

    If its only 6X... I think DC will come out ok.
    If its over 8X... No metropolitan market has ever maintained over an 8X multiple for more than 6 months prior to this current bubble. At that point the teachers, police officers, and other civic staff have no choice but to leave the market.

    I understand that DC has about half the option ARM exposure that southern California has... Due to the trouble mortgage companies are having selling their bonds... I expect DC will be as hard hit by the changes in mortgage rules as any other metropolitan market. Your area will just have half as many defaults.

    But the mania is over. Buyers are going to take their time buying. Transactions are slowing and there isn't any way to speed it up.

    As I noted on another thread, one of my coworkers had a very interesting home shopping experience in oceanside California this last weekend. At ten homes, the sellers (or their realtors) ran out to him (he was just picking up fliers with his wife) and immediately offered to cut the price 20%! Now, this is only one little example of panic...

    But just as there was a panic to buy on the way up (Buy Now or be priced out forever!), we'll see a bit of panic on the way down.

    The closer markets are to historical fundamental values (read affordability with conventional mortgages), the less impact they will see (e.g., Dallas, Austin, and a few other cities might see a small or even no decline).

    But known bubble markets, like DC...
    Panic drove the Nasdaq to 1200 when "fair value" was closer to 2,000.

    30% to 40% of the "affluent's" investment income is right now in speculative real estate. Ergo, people will rush to liquidate declining assets. Since transactions determine the market value... Most of the nation will be hard hit.

    Last I looked, zipreality had 942,000 homes for sale nationwide. That's a huge number in their MLS. 57,704 in DC. What is DC doing with 57,000 homes for sale in September?!? Last I heard, inventory plummets in July and August and stays at about 50% of the summers until Febuary. Do I expect inventory to decline over the fall/winter? Maybe. But there just shouldn't be 57,000 people trying to sell in that DC's relatively small metropolitan area. Los angeles is at 46,781. We have 13+ million people. DC/Baltimore is 8 million. I know the LA market is unstable. How can DC have more inventory and be stable?

    http://www.ziprealty.com/buy_a_home/search/form/cityG.jsp?usage=search&cKey=74rbwvlk&metro=virginia

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  18. The YOY appreciation numbers are interesting but they are ancient history for anyone who is trying to figure out what to do in this market. To get a complete picture you really do need to look at the data series showing the decline in appreciation over the last four quarters. This trend probably is not news to anyone who is paying attention to what is going on in their neighborhood.

    We are in the early stages of the next housing downturn. There is no "force field" holding appreciation above zero. The market will find its own equilibrium regardless.

    In my opinion folks who are looking to buy have plenty of time, perhaps five to seven years, before the next up cycle kicks in. This about how long the trough lasted during the last cycle. If enough potential buyers share that opinion prices will continue to decline. No one can say by how much.

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  19. Lance said...
    “In the Washington region, home prices rose well above the national average -- 16.2 percent in Maryland, 15.9 percent in the District and 14.2 percent in Virginia -- in the year ended June 30."

    www.washingtonpost.com/wp-dyn/content/article/2006/09/05/AR2006090500466.html


    Well, I must say! Atta boy Lance! You have posted data! Finally!.........Wait, oh yea, we have info that’s a little more up to date say, July maybe:

    http://www.mris.com/reports/stats/index.cfm

    Lance said...
    “Your theory presupposes that everyone buying/selling is an investor. What happens where at least 4 out of 5 transactions are for "consumption" and not "investment"? It just doesn't seem possible that everyone will suddenly be selling their homes and planning on moving into camp grounds or the like.”

    Lance, are you assuming that everyone can still afford their I/O ARM? Yea, I know, they were all 100% qualified for the loan, but why the government sponsored programs to bail them out?:

    http://www.dhcd.state.md.us/Website/programs/cdammp/Lifeline.html

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  20. Stop using that FDIC study as a crutch for your argument. It clearly states in that paper that this time, due to the loose lending and credit situation and the remarkable rise of so many metro areas at once, that there is a pssibility this bust would be worse. Conveient to leave that part out, right? It's spelled out right there in the conclusion.

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  21. Here's an interesting quote:

    "We believe that the impact of housing on consumer spending has been exaggerated by some commentators. Over the last year, the increase in real disposable income (+ $205 billion) has matched the increase in real consumer spending (+ $188 billion). Strong real wage gains are the major factor driving consumer spending increases."

    –John Ryding, chief US economist at Bear Stearns

    David's last post included:

    "Additionally, an economic recession in the US is coming within the next 9 months."

    I think the two comments are related because David seems to to be in the "Housing ATM Economic Boom" camp.

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  22. Look at this. Neil and Lance agree, with Neil perhaps being more positive.

    Neil said "If its only 6X... I think DC will come out ok." referring to median house vs. median income. When you look at submarkets like those of NVAR, or Loudoun County, it looks pretty good. Also, if you were to factor out the incomes of those receiving housing assistance, (a signifcant number in DC) and are clearly not in the market for homes, the ratio looks even better.

    I'm still waiting for the Census inventory numbers to come out. Even if homes are affordable, oversupply will drive down prices. This is a distinct possiblity in the DC condo market and in the outer suburbs where most new construction is taking place.

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  23. Builder Chops New Home Prices by 40%

    Talk about a hard landing. In an apparent attempt to clear its glut of unsold homes, Ryland Homes is offering 40% off the price of homes purchased by December 31st.

    Buyers who qualify for financing through Ryland Homes will receive 40% off mortgage payments, 40% off options, and 40% off closing costs.

    In effect, they are slashing the cost of their homes by 40%!!

    Kudos to Ryland for taking such drastic measures to clear their glut. This will draw in buyers from the sidelines, but at the same time, will crush comps in the areas in which they build.

    Here is a link to Ryland's website.

    http://www.ryland.com/find-your-new-home/23-washington-dc-virginia/web-promotion-dc.html

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  24. The other day I was talking to a friend who is trying to sell - their other home is being built and they are trying to avoid a bridge loan.

    They have one offer - but the buyer is asking for $25K in closing costs. (That seems high to me but it is a buyers market.) My friend noted that if you add in the comission from the realtor and their closing costs on the new place - it will cost them close to 50K to sell their home. And their situation is average (no exotic financing, they aren't underwater, etc.)

    Situations like this explain why standoffs are occuring.

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  25. warmblanket said:
    "They have one offer - but the buyer is asking for $25K in closing costs. (That seems high to me but it is a buyers market.) My friend noted that if you add in the comission from the realtor and their closing costs on the new place - it will cost them close to 50K to sell their home. And their situation is average (no exotic financing, they aren't underwater, etc.)"

    You should suggest that they increase the selling price by the amount of the closing costs. I was in a similar situation a number of years back where cash for closing was limited. I suggested to the seller that we up the purchase price by the amount of closing costs that I'd otherwise be responsible for and that he take over responsibility for all closing costs. This worked out well for me and didn't cost the seller anything. Everyone was happy. You're probably thinking "but the buyers want the selling price lowered? ... If the buyers want the selling price lowered, then they should make a lower offer. Chances are if they are specifically mentioning they want the closing costs paid, it is because they are short on cash for closing ... Some people are just too embarrassed to say it outright ...

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  26. Redblanket, your numbers indicate your friend has one offer for a $400,000 house. The closing cost demand amounts to a six percent reduction.

    Assuming this is a good, solid offer from a qualified buyer, what in the world is the problem? Your friend should be grateful for a bird in hand.

    A six percent reduction in this market should not cause a "standoff," barring seller greed.

    If I were a buyer right now there would be a 72-hour response clause in my offer. No response, from the seller, I move down the block to the next house.

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  27. I'm neither a "bubblehead" nor hostile to the real estate industry. I'm a potential buyer in the DC metro (actually Fredericksburg, VA) who is a well qualified, former homeowner.

    I'm sitting tight!

    I know for a fact that sellers in my area are holding on for dear life, trying to milk the last possible cent out of their properties. I actually had a woman tell me she was ENTITLED to make well over $100,000 on a property she'd owned for less than 3 years! Can you imagine? $33,000/yr just to sit on a piece of real estate! What was truly amazing was... she couldn't believe I'd walk away from a deal like that! The agent just looked at me and shook her head. She's a highly experienced professional who knows damn well that the party's over, but her clients just won't listen to the news. I told her to only send me properties with highly motivated sellers who know they're going to have to price their homes at least 20% below their neighbor before I'll even look at it.

    I think there'll be a bloodbath here. I got caught in the NJ meltdown back in 1990, and wound up with an overpriced property that I couldn't sell. Couldn't even get a lookie-loo in the door for a whole year! Wound up bankrupt. Never again! Been there, done that, got the Tee-shirt!

    And for all you R.E .industry cheerleaders who are (predictably) insisting "it's different this time", get yourself set for a "long hard slog" as Donald Rumsfeld is so fond of saying. I'm 100% pre-qualified with a credit rating to match. I'm the guy you want on the other side of the contract. Just get your clients to listen to reason and we can probably do business.

    Otherwise, let 'em go broke paying the mortgage. I've got a nice. cheap apartment that rents for under $1000/mo.

    I can sit here all year.

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  28. pmbergen,

    Bankrupt due to one bad real estate purchase? And renting since 1990? I'd listen to your opinion/advice!

    It seems that you may be so afraid of getting "burned" that you can't pull the trigger regardless of what the price is.

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  29. VA - You keep harping that "real estate is a great investment, no matter the price." That is such baloney. Do you have properties for sale, or what?

    It's a good investment when cash flow carries it. No way right now.

    Buy Treasuries, Bergin, and be patient.

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  30. pmbergin said:
    " I actually had a woman tell me she was ENTITLED to make well over $100,000 on a property she'd owned for less than 3 years!

    Wow ... it's deja vu! Isn't this basically the same statement made to that online real estate personality that time a couple months ago when there was that misunderstanding about whether it was David or not who'd posted a question? The same "entitled to" quote was used ... Perhaps we've discovered the real poser of the question here?

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  31. I actually read about a blog commenter that said (I'm paraphrasing) he was entitled to a 20% discount to the comps! Is that arrogant or what?

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  32. cooling ? it's tanking biatch
    all these government douchebag parasites will keep thier jobs- and get raises Q

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