But should he really be worrying?
The most recent data from the S&P/Case-Shiller Home Price Indexes, released July 25, show that average U.S. home prices continue to rise. According to the monthly data, prices for single-family homes in ten key metropolitan markets* rose 0.4 percent from April to May, and 9.7 percent during the year beginning May 2005. Hougan should be celebrating his new-found wealth, not worrying the night away. If he lived in Los Angeles or Miami, he would really have reason to celebrate, as those markets posted healthy 15 percent and 22.7 percent gains during the same period. Only the Boston market saw prices decline, by a modest 1.4 percent.
Yet a closer look at the data suggests that pessimism may be justified and that, while overall housing prices may have risen in May, a slowdown could be in progress. Seven of the ten metropolitan areas covered by the indexes showed decelerating growth rates when compared to the previous month, and the national composite growth rate declined for the third consecutive month.
There may be good reason to think that the home price indexes will catch up to the current public perception about the residential housing market. First, the S&P/Case-Shiller data is calculated using a lagged three-month moving average algorithm, so the index data point from each reporting month is based on sales from preceding months. So, for example, the latest numbers look back to housing sales from March, April and May, and do not yet reflect any further softening that may have taken place during June and July.
As Ed Hynes, President of Farm Creek Securities, points out, the indexes exclude a lot of real-time indicators, such as the reduced earnings estimates of home builders and the increased inventory of unsold homes on the market. The Case-Shiller “repeat sales” methodology, which pairs sales of the same home in order to measure appreciation, also does not catch the sale of new homes in its net. (Or perhaps more pointedly, it does not capture the lack of sales of new homes, or the discounts and incentives builders are throwing at buyers to entice them to buy.)
Still, the indexes and the options that track them on the Chicago Mercantile Exchange provide a nice window on the housing market. Although the options have been somewhat thinly traded in the early going (they only launched in May), they are likely to build volume as investors look to gain, and hedge against, real estate exposure.
One of the great things about financial markets (and indexes) is that they aggregate the wisdom of the crowd, and provide a foil against which to measure your individual perceptions about things like stocks, bonds, and now, real estate. What the Case-Shiller indexes are telling me right now is that Hougan may be premature in worrying about his housing investment … but that some caution is certainly merited.
* The Metropolitan Statistical Areas covered are Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York City, San Diego, San Francisco, and Washington DC.