Did the Fed Miss the Housing Decline?

Ben Bernanke’s Fed publishes the quarterly US Flow of Funds Release. Each 125 page “Z1 Release” appears at least two months after each calendar quarter, and:

• Shows the issuers, investors, and market intermediaries that buy and sell securities in the U.S. capital markets;
• Reveals where market players get their funds and how they apply their resources; and
• Provides macro level balances sheets for households and corporations.

So you can appreciate my shock when I discovered that the Fed’s own report:

• Missed most of the housing bust until December 11, 2008; and
• Underestimated the size of the housing decline by roughly $2 trillion.

FLOW OF FUNDS RELEASES, 18 Sep 2008 vs 11 Dec 2008

As of 11 Feb 2009, the last two Flow of Funds releases occurred on the following dates, with accompanying links:

• 2008Q2, on 18 September 2008
• 2008Q3, on 11 December 2008

CHANGE IN HOME PRICE INDEX

The “Data Revision” section for the 11 Dec 2008 release contains the following note:

The market value of residential real estate … has been revised from 2000:Q1 forward to reflect improved data sources. The value of owner-occupied housing … is now benchmarked to data from the American Housing Survey, and changes in the value of single-family homes … are now estimated using a repeat-sales house-price index from LoanPerformance. Previously we used a price index from the FHFA (formerly OFHEO). [emphasis added]

This index switch, from FHFA/OFHEO to LoanPerformance IS important, because:

1. FHFA/OFHEO only tracks changes in prices of homes financed with conforming loans that were purchased or securitized by Fannie or Freddie; while

2. LoanPerformance tracks changes in price of homes financed by Fannie, Freddie, or Ginnie Mae, as well as those that were financed in the non-conforming (jumbo or subprime) securitization markets that shut down in 2007-2008 and precipitated the housing crisis.

REAL ESTATE VALUE COMPARISON

To get an idea of how different “FHFA/OFHEO Indexed” real estate values are from “LoanPerformance Indexed” real estate values, consider Figure 1, below. The Fed’s change in methodology can be seen in the post 2000 divergence between the:

• Real estate valuations released by the Fed on 18 Sep 2008 (the blue line); and
• Real estate valuations released by the Fed on 11 Dec 2008 (the red line).

I’ve also prepared a chart of the simple difference between the two Federal Reserve releases, which were published within 84 days of each other (i.e., 18 Sep 2008 & 11 Dec 2008). It appears in Figure 2, below.

As the chart suggests, at the 2005Q3 peak, there was a $2.7 trillion dollar difference between the two Federal Reserve estimates in the value of households’ real estate.

Finally, to see how different the housing bust looks, depending upon which Fed release you use, consider Figure 3, below.

As of the Sep 2008 release, the Fed’s own report only recognized a $0.731 trillion residential real estate decline, through June 2008.

Eighty-four days later, in Dec 2008, the Fed raised its estimate of the real estate decline by about $1.5 trillion, so that – through June 2008 – residential real estate had declined by $2.233 trillion.

Finally, using the same Fed Dec 2008 release, and looking at the housing bust through Sep 2008, the Fed came up with a $2.790 trillion residential real estate decline.

UNANSWERED QUESTIONS – Why Did The Fed Wait To Get Smart?

1. Might this previously unrecognized disappearance of more than $2 trillion in residential real estate explain 2008’s bailout muddle, or this week’s latest $2 trillion bailout wishlist?

2. Was the switch from FHFA/OFHEO to LoanPerformance timed to paint an unjustifiably rosy picture of the housing market until after the November 2008 election?

3. Did the Fed, Treasury, or Congress really believe the Fed’s Sep 2008 release?

I can’t say.

Maybe we should give Chairman Bernanke a call. Let’s see if I can get him on his shoe phone.

Comments

[nobodyintexas:]

My hat is off to Ira I think he is to the point too many of our government and non governmental groups are just not working or at least seem to make things say what they want. Time to answer to the American people, not King Bush

Feb 12 06:06 AM

[James Wilson:]

When the SEC did not report or investigate the Executives selling off millions of shares in banks and investment banks from January to July 2008 they allowed the well connected to fool the public and the financial markets.

We here on the ground were not fooled we saw thru this Bush banking crash. There is always a banking crash when a Bush is in office. We expected it and we got it.

Feb 12 08:22 AM

[nobull:]

Not sure I agree completely. They have always had an inflation bias - rather have inflation than slower growth, until it was too late. I well remember Greenspan when asked in 2004 about the housing price explosion saying "We are not concerned with asset price variations". This even though a "genius" like him should have realized how the price fluctuation in housing affects so many inflation price points. Not to mention the growth impact on the economy. And Ben was right there, egging him on with his policies, if u read the Fed transcripts.
Thats what infuriates me. Now that prices are low, they are concerned and are moving heaven and earth to "fix" it.

Feb 12 08:54 AM

[kelm:]

This is greatdata.

two points:

1) This tells me they failed to read or listen to any of the analysts over the past few years who predicted that the entire edifice of credit derivatives based on mortgages would fail. those analysts were not limited to Roubini and Taleb who the press love to call Dr. Doom in their propagandist put-down fashion but many of the esteemed writers at the Financial Times and the Economist Magazine. These are two of the most widely recognized and respected financal publications in the world but the message I see from the Fed, our government, and business leaders is that they really don't read and take to heart what they read.

2) This article points directly at what Roubini, Jim Rogers, Taleb and others keep pointing to: how can we expect the same cast of characters who failed to see this coming lead us out of it? And that includes Bernanke, Geithener who was president of the New York Fed and most of the CEOs of the major banks, not to mention the esteemed Barney Frank.

Feb 12 10:19 AM

[John Lounsbury:]

There are two differences between the September and December reports: (1) the peak price value and (2) the peak month. In the September report, the peak month was listed as 12/2007. In the December report, the peak momthwas a year earlier, 12/2006.

Is this difference due to backward revisions of data or merely from a change in the source of housing value data? If it is the second, how could the Fed have ignored such a large difference in data from two (presumably credible) sources until December, 2008? This is two years after the revised house value peak of December, 2006!

Ira, thanks for this very useful article.

Feb 12 02:04 PM

[Ira Artman:]

Thanks all for comments.

By the way, below is the full text of the "explanation" provided by Fed in the release dated Dec 18 2008 (Page 8 of 124 page pdf), a portion of which appears above in my article.

When I read the 'note', it makes it appear, I believe, as if two data series might somehow be consistent (i.e., "benchmarked" - content-free term?) on '01Q2, '03Q2, & '05Q2.

As my chart indicates, they're not.

So this may be case where meaning of Fed's note "depends upon what the meaning of 'benchmarked' is."

But big issue is * timing * of conversion to new index.

Why did the Fed wait to report the largest decline in US housing values until after the Nov 2008 elections? Or is that also the answer? ;^)

======================...
From 2008Q3 Flow of Funds Report, 18 Dec 2008

7. The market value of residential real estate (B.100, B.102, and B.103) has been revised from 2000:Q1 forward to reflect improved data sources.

The value of owner-occupied housing in 2001:Q3, 2003:Q2,
and 2005:Q2 is now benchmarked to data from the American Housing Survey, and changes in the value of single-family homes in non-benchmark quarters are now estimated using a repeat-sales house-price index from LoanPerformance (a division of First American CoreLogic).

Previously we used a price index from the Federal Housing Finance Agency (formerly the Office of Federal Housing Enterprise Oversight).

Feb 12 03:09 PM

[Ira Artman:]

Apologize - My comment/note above has immaterial typo. Date of Dec 2008 release is Dec 11 (as noted in original article), NOT Dec 18. - Ira

Feb 12 03:15 PM

[Ira Artman:]

Also - should note that Fed's linking convention incorporates the word "current" in the link of the most recent release.

Once the next release comes out, the word "current" is replaced by a datestring.

As a result, the link for the 11 Dec 2008 release will change [!] once the next Z1 is released. Scheduled release (for 2008Q4 data) is 12 March 2009.

The link in the post above for 11 Dec 2008 will NOT change, so use the following link to navigate around the releases if you are reading this note on or after 12 March 2009:

www.federalreserve.gov.../

Feb 12 03:21 PM

[Ira Artman:]

A final 'humorous' note.

The Fed has just released the Bulletin Article:

February 12 2009
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore
PDF (398 KB)
www.federalreserve.gov...

I would think (but who can say) that this Bulletin/publication has been iin development for some time.

Page A34, left column, discusses use of same 'LoanPerformance' index that was used by Fed in the Dec 11, 2008 "Flow of Funds" release, but NOT in the Sep 18, 2008 "F-o-F" release.

Hmmmm...

Feb 12 03:35 PM

[thatguy57z:]

Your right they all need to answer to the American people, the stock market works like are government dose like blowing smoke up are A**'S, its time to turn the tables and start being the public and not the government servant's.


On Feb 12 06:06 AM nobodyintexas wrote:

> My hat is off to Ira I think he is to the point too many of our government
> and non governmental groups are just not working or at least seem
> to make things say what they want. Time to answer to the American
> people, not King Bush

Feb 15 11:58 PM

[Ira Artman:]

See Part II of this article at:

Housing Indexes: When Will The Fed Get Smart?
seekingalpha.com/artic...

Feb 17 03:28 PM