Case/Shiller Index: Are We Close to a Bottom?

Karl E. Case, one of the economists that developed the 20 MSA methodology, a widely used subset by Standard & Poor’s in the S&P/Case Shiller Home Price Index, thinks that the housing market may be near a bottom.

According to WSJ, in a paper presented this week before the Brookings Institution in Washington, Mr. Case argued that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps. He also noted that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months.

Obviously, anyone making specific predictions on the Housing sector should be regarded with some doze of skepticism. After all, the housing collapse led to rapidly falling home prices and massive defaults on mortgages, causing major dislocations in financial markets - the ongoing negative effects of which, in terms of write-downs, credit contraction and dilutive capital raises, continue to weigh heavily on both Financials and the housing market. However, considering Mr. Case’s authority in the field, his model of predictions, and expertise on real estate markets and prices, we can argue that while the economics has never been a controlled science, perhaps, there is some cause for optimism here.

At the same time, the Case-Shiller index’s most recent reading was 19% below its July 2006 peak, and many analysts, including Robert Shiller, the co-creator of the Case/Shiller index, say the decline is far from over since inventory of unsold homes on the market is still very high. The main basis for Shiller’s argument is that until that excess is absorbed, home prices will continue to be negatively affected. This has further fueled the debate of whether the deterioration in the Housing sector will continue, or if we are seeing the beginning of the end of the crisis. In addition, if so, if there is some sort of consolidation taking place at current levels.

Irrespective of these suppositions and as the debate continues, it would be naive and unreasonable to pretend that the housing sector, which has undergone the biggest speculative boom in U.S. history, will start immediately uptrending or come back with a bang. Instead, a slow languishing bottoming action is the most likely scenario.

 

Comments

[t-bird:]

Agree with the assessment that the R.E. may be reaching a bottom. But this is only in the locations the Case/Shiller index is monitoring. Areas in Ca. Fl. and Nv. could be on the cusp of beginning to improve. Other states that were affected later are still experiencing the decline.
It took several years for this to develop and I fear it will take a similar or longer time for it to play out.
With additional sectors now being involved including consumer credit, alt-a mortgages, equity lines and commercial real estate, we have a long way to go. Dr. Nouriel Roubini, Professor of Eco. @ NYU has a good video on this at Bloomberg.

www.bloomberg.com/avp/...

2008 Sep 14 09:32 AM

[buyitcheap:]

I don't know, the monthly rent (PV'd over 30 years at 5%) still is much lower than the asset cost by at least 10% at least in my area (Boston/Cambridge). I'd say prices need to fall 15% in order to make it more "normalized." meaning the only difference between the rent and the mortgage payment is the tax break + some net cash flow of 8-12%. but that's just a guy wanting to buy some good rental property talkin'. Best to all.

2008 Sep 14 09:40 AM

[buyitcheap:]

Sorry thanks to T bird for the vid.

2008 Sep 14 09:41 AM

[notsosmart:]

the only bottom we are close to is the one we are sitting on.(& there is plenty of useless paper to wipe it).you cant believe anybody.all have an agenda.how long have the experts predicted a bottom?LOL

2008 Sep 14 10:27 AM

[davidma11:]

I see more downside and ALT A problem the next shoe to drop. I still see lower prices, yes even in CA. It will be interesting still waiting for people to get real with respect to the current housing market. Lower prices are the answer.

2008 Sep 14 11:19 AM

[Tom Lindmark:]

I have been in the camp that thought there were hopeful signs of a bottoming out at least in Phoenix. Then yesterday I attended with a group a home auction in Phoenix. We went with the intent of buying and buy we did. At prices between $32 and $50 a square foot. We were buying homes in areas in which the published median price is say around $180,000 for less than half of that.

It was a great deal, we bought 12 houses and spent about $1.2 million. We are able to put tenants in these properties and get cash on cash returns of from 8.5% to 15%. Like I said, a great deal from our perspective but it sure put a new perspective on the market. It's terrible.

Just one other observation. The auction was poorly attended and the bidding was sluggish at best.

2008 Sep 14 01:13 PM

[real azbroker:]

T-bird is smoking too much of the green and white stuff or drinking too much of the bubbley. The currnt RE market conditions as almost all US homebuyers will agree, developed over less than 24 months (6/2004 - 6/2006) then went into the tank. where it has been for more than 24 months and will remain for at least another 6 - 12 months. Its cause as seen by the continuing failure of greedy lenders and speculators, e.g., Lehman, Fannie Mae, Freddie Mac, Countrywide, etc., etc. will not be cured until the feds make the failures subject to the free market and stop trying to be "lifesavers" with the public's money.

Bush and paulson need to keep their hands off. They help make the mess so stay away until the financial bums learn thier lesson.

2008 Sep 14 01:40 PM

[paullev:]

Commentators continue to refer to past declines in the economy and the housing market. These commentators don't get it including Case-Schiller. We are in unchartered waters. This is a global economy and is much larger then 10 or 20 years ago. Our enormous debt and inefficient labor market can not compete in the 21st century with emerging economies. It will probably take years for our economy and housing market to bottom. Government bailouts are only delaying the inevitable process.

2008 Sep 14 02:07 PM

[Matt Blackman:]

Interesting comments from Chip Case! While the S&P Case-Shiller Index is probably the most reliable leading indicator for nationwide home prices, it does have a few of shortcomings.

1) It covers pair sales data for 20 cities only. It does not track housing prices in rural areas that have not been as hard hit and generally lag metropolitan home price declines.

2) The CS HPI only tracks existing home prices, not new homes.

3) Foreclosures are still rising rapidly. As of the latest RealtyTrac data there were more than 303,000 foreclosures in August up from an average 247,000 per month in Q2-08. This will not have a positive impact on prices and will also negatively impact the CS HPI.

4) The C-S HPI does not look at the state or direction of the economy. It is deteriorating which will lead to increasing job losses and lower consumer spending - both negative factors for the housing market nationwide.

I find it interesting that Chip is saying the relationship between incomes and house prices are returning to normal. That is not what my research shows.. see seekingalpha.com/artic...

The problem with bear markets is that they are punctuated with often powerful bear market rallies but these eventually fade and the asset class then puts in a lower low.

Could the improvements that Case, an economist not a market expert, is seeing be evidence of a bear market rally?

2008 Sep 14 04:09 PM

[Did U Think...:]

I laugh when I read RE nearing a bottom. Back in 1929 there was some ass right there saying "the bottom is in" each time the plummeting paused. Weeks later the plummeting picked up and even got worse. This is not over until everyone rues the day they ever bought a house on credit.

Go look at the problem areas: CA, FL, NV, etc. The home prices are still 2x or more what they were 10 years ago. There is no sign of bottoming yet. This is the biggest credit bubble in the history of man and now it has burst. Only a sheeple thinks this can be over in 12-18 months. It will take several YEARS. As in 3+ years. The ARM resets continue through 2011 people. In fact, we have not even seen the peak of them yet.

Learn to recognize a Ponzi sceme and you will stop losing money in the stock and asset markets.

2008 Sep 14 05:11 PM

[Poor and Un...:]

After seven years we are still to see recovery in dot com sector. Till the C-S index gets back to 2000 level there is no bottom. Lot more banks have to fail before we see the bottom.

Sure sign of bottom would come after the homeowners accept the reality of their house price. But once the owner can only reduce the price to a level when their equity is entirely wiped out, after that it is out of their hands and in the lap of mortgage holders. So till the mortgage holders accept the real value (not appraisals conducted by incompetent realtors) there will not be gloom and doom, which is market bottom.

Do not confuse housing with homebuilders, who tend to accept the realty very quickly and adjust their business models, which reflects in their stock price.

So when you hear despair, glom and doom, realtors start driving the cabs or return to their old jobs - that is bottom! When you hear a New York Cabbie telling you about his dreams of returning to real estate business as soon as he cleans his credit report – that is bottom. When media stops asking for opinions from NAR – that is bottom. When $100K house returns back from $500K asking price to $100K - that is bottom.

2008 Sep 14 06:29 PM

[TinyMIghty:]

Please watch the video from Tech Tick as follows:
finance.yahoo.com/tech...=^gspc,fre,fnm
Robert Shiller has totally different idea from Case.

2008 Sep 14 06:32 PM

[David K:]

Not even close to the bottom. Just take a look at Wachovia's $120 billion of "pick a pay" option arms that are beginning to reset 500 - 800 bps higher!

2008 Sep 14 07:37 PM

[IAS360 Hous...:]

On Tuesday, September 9 Integrated Asset Services, LLC (IAS, www.iasreo.com/ias360u...), a leader in default management and residential collateral valuation, released its IAS360 House Price Index for July 2008. The monthly report, which includes the most current and granular data available in the industry, showed a 0.9% appreciation in house prices on a national level in July, and a -11.4% decline from July 2007 to July 2008.

2008 Sep 15 05:32 PM