The difficulty in assessing the state of housing prices around the world is exemplified by two stories appearing over the weekend. Anecdotal reports, builder incentives, median vs. mean, wildly divergent geographical sampling, the role of home improvements in successive sale pricing, and a myriad of other factors have made it exceedingly difficult to assess the true state of housing markets, both in the U.S. and around he world.
Add to this mix buyers who are unwittingly paying too much today because they simply don't know any better (think illegal immigrants here in the U.S.) and it's nearly impossible to determine much of anything about current home values.
About the only thing that you can know about housing prices, with a reasonable degree of certainty, is that they're not going up as much as they were a year or two ago, and in some areas, they are unquestionably falling.
From this article (subscription required) in the Economist comes word that home prices in the U.S. are rising at an annual rate of either more than ten percent or at less than one percent, depending upon which report you look at and when it was published.
America's housing market has certainly caught a chill. According to the Office of Federal Housing Enterprise Oversight [OFHEO], the average price of a house rose by only 1.2% in the second quarter, the smallest gain since 1999. The past year has seen the sharpest slowdown in the rate of growth since the series started in 1975. Even so, average prices are still up by 10.1% on a year ago. This is much stronger than the series published by the National Association of Realtors [NAR], which showed a rise of only 0.9% in the year to July.
The OFHEO index is thought to be more reliable because it tracks price changes in successive sales of the same houses, and so unlike the NAR series is not distorted by a shift in the mix of sales to cheaper homes. The snag is that the data take time to appear. Prices for this quarter, which will not be published until December, may well be much weaker. A record level of unsold homes is also likely to weigh prices down. The housing futures contract traded on the Chicago Mercantile Exchange is predicting a fall of 5% next year.
Could annual price appreciation for the U.S. housing market really have dropped from +10 percent to +1 percent in a two month period? Monthly data is notorious for its volatility and the OFHEO data shows great deceleration from the first quarter to the second - maybe the OFHEO data for the third quarter will confirm the most recent report from the National Association of Realtors.
Overseas, the picture seems brighter, but here geographical sampling paints a misleading picture. Excluding France and South Africa, the population of the top seven countries with still buoyant home prices in the table below is less than that of the U.S. state of California, where, according to recent data compiled by DataQuick, median home prices have risen only five percent from year ago levels.
Elsewhere, our global house-price indicators signal a cheerier story. House-price inflation is faster than a year ago in roughly half of the 20 countries we track (see table). Apart from America, only Spain, Hong Kong and South Africa have seen big slowdowns. In ten of the countries, prices are rising at double-digit rates, compared with only seven countries last year.
European housing markets—notably Denmark, Belgium, Ireland, France and Sweden—now dominate the top of the league. Anecdotal evidence suggests that even the German market is starting to wake up after more than a decade of flat or falling prices, but this has yet to show up the index that we use, which is published with a long lag (there are no figures for 2006). If any readers know of a more timely index, please let us know.
Some economists have suggested that Britain and Australia are “the canaries in the coal mine”, giving early warning of the fate of America's housing market. The annual rate of increase in house prices in both countries slowed from around 20% in 2003 to close to zero last summer. However, the canaries have started to chirp again. In Australia average prices have picked up by 6.4% over the past year, although this is partly due to a 35% surge in Perth on the back of the commodities boom. Likewise British home prices have perked up this year, to be 6.6% higher, on average, than they were a year ago. Thus it is claimed that housing markets in Britain and Australia have had a soft landing.
Having been in Alberta, Canada in recent weeks and hearing local reports of the housing crisis in Fort McMurray, it was clear just what a commodity boom can do for regional housing markets. From the tone of the reports it sounded as if there was genuine fear of oil sands workers freezing to death this winter due to the lack of housing.
Naturally, prices have skyrocketed, though this market is surely much smaller than the Perth, Australia example cited above.
Speaking of Australia, a recent report from Sydney appears in sharp contrast to the rosy picture of Perth, as well as the national boost in prices from year ago levels as indicated in the table above. This story from the Sydney Morning Herald explains:
SYDNEYSIDERS are losing their homes at a record rate, forced out by crippling mortgage payments, exorbitant petrol prices and high personal debt.
The latest NSW Supreme Court figures show repossessions by financial institutions are approaching an annual total of 5000 - more than twice as many as three years ago.
In 2002 there were 2189 repossessions after defaults by borrowers. In the 12 months to March the figure was 4873 - more than double the rate under Paul Keating's 17 per cent interest rate regime in 1990.
This is certainly a much different situation than Perth, however, anecdotal reports have for years been given little merit when compared to statistics collected by various data reporting agencies. How do you reconcile the apparent contradiction between the anecdotal reports and the statistics?
Anecdotes vs. Statistics: Which One Do You Believe?
Prompted by this post, a number of distressed homeowners from south of here have emailed with questions about what to do now that comparable houses are fetching 20 percent less than what they paid last year and they now want to relocate.
With anecdotal reports in such conflict with the statistical data, it's hard to imagine how easy it would be to accept the result of your bet on local housing markets via the Chicago Mercantile Exchange when the talk around town is inconsistent with your housing options gamble.
What to do?
One factor to consider regarding anecdotal reports of housing price trends is that there are surely many reporters who would gladly print stories of sellers that are making money after selling a home they purchased just a year ago, yet all you seem to come across are the ones like this one from Reno, Nevada where a ten percent haircut from last year's price seems about the most optimistic outcome.