Home prices fell 3.4% from September to October according to the Case-Shiller Home Price Index for Phoenix, Arizona.
From the peak in June 2006 until October 2008, residential real estate prices in Phoenix have fallen 41%.
Let’s say that another way; Phoenix homes were 68% more expensive in June 2006.
We probably won’t see prices of Phoenix homes strengthen until February or March (and those Case-Shiller numbers won’t be published until 2 months later). I’m guessing that by June there will be a lot of buzz about Phoenix home prices having bottomed out reflecting strong Spring sales and, in fact, that may be true in some areas of metropolitan Phoenix.
Let’s assume that Phoenix home prices continue to fall at about 3% per month in November, December and January (reflecting homes that went under contract October - December). What the heck, let’s just say prices fall (have already fallen, really) 10% more. If that happens (very likely), Phoenix home prices in January 2009 would be similar to Phoenix home prices in mid-2003, 5.5 years earlier. (This is entirely consistent with the more up-to-date zip code graphs of home prices on this web site.)
If Phoenix home prices were to continue to fall by about 3% per month (which I don’t expect but you never know), by the Fall of 2009, Phoenix home prices would be equivalent to prices in January 2000.
As always, the Case-Shiller index obscures the large differences within metro Phoenix sub-markets. This web site, Arizona Real Estate Notebook, is the best I’ve seen for allowing you to look at real estate trends by zip code and to tease out trends within metropolitan Phoenix.
Phoenix Home Price Index
The S&P/Case-Shiller Home Price Indices are calculated monthly using a three-month moving average and published with a two month lag.
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ks 12.30.08 at 10:10 am
The symmetry is impressive.
Cbass 12.30.08 at 3:54 pm
Indeed!
I believe these numbers are not true representation at this point though. The lower end of the market is driving things right now. Home prices were overstated during the boom and are being understated now.
ks 12.31.08 at 12:40 pm
Cbass,
At first I agreed with your statement about the representation problem, but then searched the web on Case-Shiller (http://en.wikipedia.org/wiki/Case-Shiller_index) and am not so sure:
“The indices are calculated from data on repeat sales of single family homes, an approach, developed by economists Chip Case, Robert Shiller and Allan Weiss. The indices are normalized to have a value of 100 in the first quarter of 2000.”
There is no text (on that site) as to how the individual properties are weighted. There would still be a representation problem if the Case-Shiller index did not weight the recently sold “similar” properties appropriately. The “similar” criteria would have to take into account lot size, house size, and location.
(O.K. I know I’m getting long winded and boring but…) A very simple example:
If there were only two similarity classes (expensive, and cheap) and:
* There are 10 expensive houses
* There are 100 cheap houses
* 2 expensive house recently sold
* 30 cheap houses recently sold
This implies that 20% of the expensive houses were recently sold and 30% of the cheap houses recently sold. The fraction of all expensive houses is 10/110 and the fraction of all cheap houses is 100/110.
Then the weight factors (w) for each individual entry in the data base should be
* w_expensive = (1/2)*(10/110)
* w_cheap = (1/30)*(100/110)
NOTE:
If you just add up all of the weights you get 1:
2*w_expensive + 30*w_cheap = 110/110 = 1.
Assuming the Case-Shiller has reasonable similarity classes and is weighted correctly, then the index should be a “fair” representation.
When you look at John’s Price per sq-ft charts within a zip code you are probably seeing a decent representation without John having to do the whole Case-Shiller type thing.
ks 12.31.08 at 12:52 pm
Cbass,
After thinking about this more, I believe that you are correct. I think that the Case-Shiller just weights each house price by 100/(year 2000 price). I do not think that there is any type of similarity classes involved.
This would then lead to the repersentation problem you stated.
Sorry about the long-winded previous post
-KS
(Keeping it not so Simple)
John Wake 12.31.08 at 2:26 pm
ks,
Both my zip code home sale graphs and Case-Shiller indices are based on homes that sold. There could be a composition problem if cheaper homes are selling in disproportionately large numbers, which is probably what is happening now.
You could say that the cheaper homes are selling more because their prices have declined more. On the other hand, you could also say that the more expensive homes are selling less and so face more downward pressure on future prices.
So I don’t know how it shakes out. I just assume that my graphs and the Case-Shiller indices are excellent proxies for whatever is really happening in the market.
ks 12.31.08 at 4:17 pm
John,
Trying to extract information from data is not easy. As you know, there seems to always be many effects that cloud the information that is desired. This is especially true when the data is taken during a phase transition.
I think that your strategy of breaking the data up in terms of zip codes is a good one. By looking at your plots it is easy to see that, for example, the 85323 (Avondale) zip code has been hit super hard and the 85282 (Tempe) is fairing slightly better. For someone looking to buy a house, this is good information to have.
Everyone wants to know where the bottom is. I wish there was some easy way to plot this up (before the fact). All we can do in trying to determine the bottom is look at as much data as possible; extrapolate trend lines, and figure out what arguments make the most sense. It would be much better to have the magic plot.
Gimmie Magic Plot!
John Wake 12.31.08 at 5:14 pm
I have a theory that once a few zip codes bottom out, I’ll be able to get a good feel where other zip codes will bottom out by looking at the historical relationship of prices in the bottomed-out versus non-bottomed out zip codes. Of course there are a lot of complicating factors, particularly in newer areas where the stock of homes has changed over time.
Cbass 12.31.08 at 5:41 pm
KS & John,
I would definitely like to understand the data set more but I was just saying that I think prices have not declined as much as most would like to believe. Most of the sales going on right now seem to be on the lower end so I assume that this has some effect on charts. Either way prices are definitely declining, cant argue that one.
Personally I would really like to see the bottom soon, I think most of the excesses of the past several years have been removed and plenty of people paid their price. As much as I was opposed to Mr. Obama I believe a psychological shift will take place when he takes office and that will be good for the economy in the short run. What he chooses to do with his economic policy will have more effect on the long run. I tire of being a doom and gloomer all the time. I am ready to face a brighter future for my sons sake…
Shift 12.31.08 at 9:57 pm
Cbass,
Bear fatigue is getting to you.
You just need to recharge your doom-n-gloom batteries
There is plenty of crazy-scary stuff going on in this economy to keep us surprised.
Doom-n-gloom must read:
Denniger has his 2009 predictions up. He did good on the 2008 predictions. The 2009 are flat out scary:
http://market-ticker.denninger.net/archives/689-Where-We-Are,-Where-Were-Heading-2009.html
-Shift
(Formerly KS)
Brian 01.01.09 at 1:35 pm
Shift: can you say “outlier”? Everyone gets lucky. One year of good predictions shows us nothing. Investors know this. Style has a lot to do with success. If you are of bearish persuasion, then last year was your year. Enjoy it!! But history shows us that 3 out of 4 years are for the bulls, not the bears.
Regarding the skew in home sales data: I think it is fairly obvious that the lower end of the RE market has the higher turnover. It is where speculators can best play, with cheaper homes that have a better chance of positive cash flow as rentals. The high end of the market never works for rental property because of high cost per square foot and a limited pool of well heeled renters. It is inherently riskier for speculation, even in times that are attractive to flippers (late 70s and 2003-06), because there is more risk if you can’t flip you won’t be able to hold, either. Because of lower turnover and less speculation, it is more stable both on the way up and on the way down.
That said, I expect N. Scottsdale to “mean revert” back to the same levels as 2000, even if it takes more time due to lower turnover. What would that be? $200 / sq. Ft.? versus $100 / sq. ft. at the low end? I know some N. Scottsdale was selling at $400 at the peak, which is like San Francisco prices. Not sustainable.
Speaking of late 70s: John, do you remember when Phoenix house prices doubled between 1974 and 1978? What did 1978 to 1995 look like? Almost flat for 15 years. Mean reversion. (this is from my memory, Shiller data doesn’t go back that far. You could buy a new 2000 sq ft home in N. Phoenix for $20K in 1974 ($10 / sq ft!!) and it was worth $40K by 1978).
Shift 01.01.09 at 4:03 pm
Brian,
Hi there. If you are so bullish, then why all the government intervention talk? This bear is dying out and there is no need for any government intervention what-so-ever. Am I right or am I right?
You got me: I am a rather bearish creature. I guess it is part of my personality.
As far as the predictions: This stuff is just for fun. Kind of like reading horoscopes.
Remember: Bears get fed. Bulls get fed. Pigs get slaughtered.
Have fun going long this new year
Brian McMorris 01.01.09 at 4:36 pm
Shift….you made my point for me. Thanks! Like I said, style is what determines success. You are a bearish person, so probably did very well the last year. I am a bullish person, so didn’t do so well, though I avoided the worst of it, because I am NOT a pig and I saw this coming (though not to this degree for sure). But those who went all in on real estate in 2006 or on tech stocks in 2000, those are the pigs, and they all got slaughtered.
As for the Fed, yes, you could say that they could start letting off the gas about now and there is enough monetary stimulus already in the system so the economy and RE would probably pull out of a swan dive on their own. (ecnomists say that monetary stimulus takes up to 12 months to take hold). But guess what, we are talking about politicians here. They will overshoot the mark once again, and will keep their foot on the pedal until too much stimulus is put in.
For this reason, I am not only bullish on the economy and markets recovering, but also am bullish on inflation. I see a weaker dollar later in 2009 and inflation picking up in 2010, once it is clear global economies are once again on the mend. I am fully invested in anti-inflation trades, namely energy, materials, precious metals, emerging markets (raw material oriented economies) and yes (painfully) a little real estate.
Brian 01.01.09 at 4:51 pm
Shift….I meant to recommend some other Bearish pundits to you. You can never have enough friends :o) All these guys can be googled. They all have their own websites and make prognistications as good or better than your boy “Karl Denninger” (really, many of those predictions were not that courageous. I am not sure what he is crowing about: “Government will meddle”; give me a break!!!) Even me the Bull, had made many of those predictions, though I am not in the habit of publishing my predictions and hoping to get lucky. I would like to see his list in 2005 or 2006.
Here are some other “Bears”, many of whom are very well regarded:
Jeremy Grantham
David Tice
Robert Prechter
Bill Fleckenstein
Marc Faber
Fred Hickey (at least the last few years)
Doug Kass
Steven Roach
Jim Rogers
Peter Schiff
There are lots to choose from. They were all equally right in 2008.
Brian 01.01.09 at 5:32 pm
After reading through Karl’s entire post, I am pretty sure he is no economist, or even well educated in economics. He makes a number of contradictory “predictions”.
- He can’t predict a sell off in Treasuries but at the same time say the “Fed’s attempt to “pump liquidity” will be shown to be an abject failure”, as they a failure would cause buying of Treasuries (money seeking a safe-haven) not selling.
- “General Motors and Chrysler will fail to meet their targets and it will be labor that sinks the deal”. What kind of prediction is that? That is reality
- “Noise about a US “AAA” downgrade will continue”; but he also says all other currencies will be worse, that “liquidity pumping” will be a failure and that Americans will save 10%; which is it? How can the American govt debt be downgraded when the rest of the world is worse (credit ratings are relative to other credit options. They are not rated against some absolute standard)
- “China will be “ok” are deluded; they have a horrifying overcapacity problem (debt-financed, of course)”; hey Karl!!! didn’t anyone tell you that China is running surpluses and is not financing with debt?
- “Foreign uptake of Treasuries will be choked off - by necessity”; again, you can’t have this happen and at the same time talk about “The Dollar will not collapse” and strong Treasuries.
- “Protectionism and currency manipulation will rear their ugly heads in 2009″; again, that is no prediction, but a statement of the obvious to pad his “wins” next New Year’s Day
There are more inconsistencies, but I don’t want to run on. He is very critical of Bernanke’s judgement and knowledge, as if he has a better understanding of economics (HIGHLY unlikely). I would not pay a moment’s heed to people like this. He throws all kinds of stuff at that wall hoping that some of it will stick. Sorry, but I won’t be listening to Karl. Hope he is not your friend ;O)
Shift 01.01.09 at 5:49 pm
Brian,
I just want to clear one thing up:
Karl Denninger is not “my boy”. I made a big mistake if that is the impression one gets from my mentioning his 2009 predictions. I find him entertaining and I mentioned the predictions to Cbass to refresh his gloom-n-doom batteries (and the predictions had plenty of doom-n-gloom). That is all.
I like Peter Schiff but he is a bit more of an inflationista than I would like. I like what Nouriel Roubini used to say before he got too into stimulus packages as a way to save us. I have only read several Bill Fleckenstein articles, but have liked them all. The deflationista blogger I like the most is Mish (http://globaleconomicanalysis.blogspot.com/).
I ‘ll have to check out some of the names on your list that I am not familar with.
I think the best website for credit issues is http://www.calculatedriskblog.com
if you have not visited this site you should do so. It is not just for bears types. Very good information for all.
Take good care
Brian 01.01.09 at 8:32 pm
Shift…don’t take my jibes too seriously. Just having some fun like you. I also get a kick out of all these prognosticators. It is my observation that if you check out enough of them, there will always be a few that are right every year. That is just probability, not capability.
The main point I try to stress is being true to oneself. Style is the whole game in investing (as in life). The worst thing someone can do is get scared out of their natural style. If you stick with what is natural to you, it will eventually be rewarded. Now is the time to hang in there if already long thru this downturn. And as mentioned, for a century and probably longer, the bullish perspective wins 3 out of 4 years (nothing to say the bears can’t win two years in a row followed by 6 bull years). But the odds for winning over the long haul with a truly bearish perspective are only 25% so that is a tough style to follow.
This is the first I have seen your name on John’s blog. I hope to see your posts here again sometime.
Shift 01.01.09 at 11:55 pm
Brian,
I changed my handle from KS to Shift.
KS was short for Keeping it Simple. I used that as a reminder to my self so as not get too long winded and boring. I got tired of my silly reminder.
I now use Shift because there is a shift key on my keyboard. I figure that is as good a way to pick a name as any other.
New name same great flavor