FHFA Housing Price Increases Are Suspect: Better Stick with Case-Shiller

If your wonkish side was troubling you over the disparity between the Case-Shiller price index and the FHFA price index, here’s the reason for the different results.

From the WSJ Real Time Economics blog:

“The FHFA uses the prices of homes backed by mortgages sold or guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE), excluding refinances. That means it’s only looking at homes sold within the conforming loan limits, which are set at $417,000 in most markets and rise to as high as $729,750 in the most expensive housing markets,” Nick Timiraos wrote. “The housing crisis hit the bottom end of the market first, so it makes sense that a recovery would begin there.”

Other issues may be contributing to the differences, primarily due to the index’s reliance on loans backed by federal agencies. Abiel Reinhart of J.P. Morgan Chase notes that the FHFA index is based on loan pairs of repeat transactions through one of the government agencies. “Consider what this means for a home that was bought with an agency mortgage in the late 1990s, bought again with a non-agency mortgage in the midst of the housing boom, and then bought again in the last few months. Because the middle transaction is excluded, the FHFA price index will calculate the change in the home price based on the 1990s and very recent transaction. Even after home price declines, this difference will often be positive (the FHFA index is up 57% over the last decade),” he said.

The article goes on to discuss some other more minor sources of noise in the FHFA numbers. One is pretty interesting. New home sales aren’t counted no matter the source of the mortgage. So a new home that was sold to a buyer who subsequently defaulted and the house is resold after foreclosure, it won’t show up in the data. As we all know, a lot of the foreclosure resales are just that — new homes that the buyer lost and first time buyers or investors are snapping up on the cheap.

The moral of this story is that the increase in home prices that the FHFA showed the past two months is questionable. FHFA used to be my favorite index simply because it tracked repeat sales and had tons of data sets. Now it looks like the serious dislocations in the housing market may cause its methodology to produce suspect numbers. Probably better to stick with Case-Shiller as a broad measure of market conditions.

Comments

[BookValue:]

FHFA tracks the whole country. Case Shiller tracks 20 cities. Not exactly a broad measure.

Apr 24 11:02 AM

[bmac1:]

FRE & FNM Poised to POP. better get some before the jump!

Apr 24 01:05 PM

[HardwoodFlo...:]

BookValue- good point.

The whole price propisition like the "affordability index" are lousy data points to guage a market.

Just like real estate the country is too broad and diverese to have these "blanket measures" then draw a conclusion. Detroit is not Minneapolis for example. Each market has it's woes. But in reality what good does it do to have a national "average". Santa Barbara is not Las Vegas - and the rest.

People masterbate these numbers to whatever out come they seek.

Apr 24 02:43 PM

[Tom Armistead:]

As Book Value notes, Case Shiller only tracks 20 cities. It gives additional weight to higher value homes and to more recent sales. It does not include refinancing, which is included in some versions of the FHFA indexes. FHFA includes only conforming mortgages, while Case Shiller includes Alt A, subprime, etc.

Case Shiller accurately describes the craziness in California, but FHFA gives a better idea of what is happening for the rest of the country.

Case Shiller exaggerates the housing market problem.

Apr 24 04:24 PM

[Socialism c...:]

Reminds me of the article in my local paper (small city) last week, talking about the new assessment values, and the amount by which they've declined. It noted that foreclosure sales were not included in the formula used to determine assessment values, because they were not considered "arms-length" transactions...but rather, distressed sales. Well, duh!! But so what??? The value it sold for IS what it is worth, regardless of WHY it was sold! That masks real property values -- whoever bought that foreclosure home at a steep discount is a buyer no longer in the market for other non-foreclosure homes!

My bottom line, folks: so much of the data and interpretations we are currently being fed, are FUZZY and MANIPULATED. We are being given very nuanced views of current conditions. I believe we have MUCH farther to go on all this. And another 20% down on median home price, before all is done.

Apr 24 04:41 PM

[HardwoodFlo...:]

Socialism, I agree with almost you're whole assement save the 20% more to the downside. I don't have any evidence, and that is telling, but where I am (midwest) there is pretty good pace in the markets. Here I'm talking about sales and new home builds. But we never had the big foreclosures of California or Florida et al. We never had the big run up either. I think that to get that kind of momentum to the down side the whole country needs to feel the pain and I'm not sure we are there. I think NYC will go down 40% but I don't know about places like Chicago, Denver, Milwaukee, St. Louis, Minneapolis, Portland, Seattle and the like. What I mean is I don't think you'll see the big fall everywhere so therefore it will be hard to move the needle everywhere 20% to the downside.

Apr 24 05:21 PM

[Tom Lindmark:]

Caught by that old appraisal standard weren't you. It used to be that appraisers always excluded foreclosure or distress sales. When they only amounted to a miniscule percentage of total sales that made sense. Now that they are the market appraisers use them to derive value.

Sounds like your assessor chooses to live in the past in order to keep values artificially high. Cheer up though, if they lower the values they just have to find another way to tax you.


On Apr 24 04:41 PM Socialism cannot compete! wrote:

> Reminds me of the article in my local paper (small city) last week,
> talking about the new assessment values, and the amount by which
> they've declined. It noted that foreclosure sales were not included
> in the formula used to determine assessment values, because they
> were not considered "arms-length" transactions...but rather, distressed
> sales. Well, duh!! But so what??? The value it sold for IS what
> it is worth, regardless of WHY it was sold! That masks real property
> values -- whoever bought that foreclosure home at a steep discount
> is a buyer no longer in the market for other non-foreclosure homes!
>
>
> My bottom line, folks: so much of the data and interpretations we
> are currently being fed, are FUZZY and MANIPULATED. We are being
> given very nuanced views of current conditions. I believe we have
> MUCH farther to go on all this. And another 20% down on median home
> price, before all is done.

Apr 24 06:40 PM

[I am not a ...:]

This all too true around the western world actually. The realtors had their day in the sun after talking up house prices,now they are being exposed for what they really are, shills.
ironic name isn't it ? :-)


On Apr 24 06:40 PM Tom Lindmark wrote:

> Caught by that old appraisal standard weren't you. It used to be
> that appraisers always excluded foreclosure or distress sales. When
> they only amounted to a miniscule percentage of total sales that
> made sense. Now that they are the market appraisers use them to derive
> value.
>
> Sounds like your assessor chooses to live in the past in order to
> keep values artificially high. Cheer up though, if they lower the
> values they just have to find another way to tax you.

Apr 25 10:07 AM

[theseanman:]

yes, and they even masturbate.


On Apr 24 02:43 PM HardwoodFlooring wrote:

> BookValue- good point.
>
> The whole price propisition like the "affordability index" are lousy
> data points to guage a market.
>
> Just like real estate the country is too broad and diverese to have
> these "blanket measures" then draw a conclusion. Detroit is not
> Minneapolis for example. Each market has it's woes. But in reality
> what good does it do to have a national "average". Santa Barbara
> is not Las Vegas - and the rest.
>
> People masterbate these numbers to whatever out come they seek.

Apr 25 11:45 AM

[Steven R. S...:]

Often times, in market conditions like we are in now, the Sales will include Concessions that prop up the Prices, which are Not deducted or accounted for in their statistics.

Apr 25 03:11 PM