Wednesday, March 14, 2007

Comparing the previous and current real estate cycles

The Case-Schiller Home Price Index is available for a number of markets around the US. This index tracks the repeat sales of single family homes, and thus serves as a unique measure of changes in house prices across time, without distortions from new development, changes in sales mix, etc. A detailed discussion of the index methodology is available in PDF format (here). From this document:

The S&P/Case-Shiller® Home Price Indices are designed to be a reliable and consistent benchmark of housing prices in the United States. Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

The historical indices go back to 1987, and are available in Excel fromat from Standard & Poor's (here). I've extracted and plotted the data for the Boston MSA to emphasize a few points. The Boston MSA consists of these counties: Essex MA, Middlesex MA, Norfolk MA, Plymouth MA, Suffolk MA, Rockingham NH, and Strafford NH. Here's how prices in this MSA have behaved since 1987:

The prices are indexed to a value of 100 in January 2000, thus this plot shows relative price changes indexed to that date. Interestingly, the Chicago Mercantile Exchange (CME) now allows futures trading based on this index (here). The last five bars in the plot correspond to the contract prices for futures over the next 5 quarters, recorded on 3/12/07. The predictive value of these contracts are suspect, given that they are thinly traded, but they do give some indication if where bets are being placed.

To put the price changes into a more accesible format, below I've plotted the year over year change in Boston MSA prices starting in 1988, along with the CME futures contracts:

This plot makes clear the previous bear market starting in 1989, followed by a slow recovery, eventual multi-year bull, and the current bear market beginning in 2006.

Zooming in on the end of the last bull run, one can see the growing downtrend in prices (trending at -5% yoy for the most recent available data), and the CME futures for the next five quarters. Clearly, little immediate recovery is anticipated in the futures market, which are predicting continued deprectiation in SFH prices at around -5% yoy through next winter.

An interesting comparison can be made by examining the YOY % Change in the CS HPI for Boston MSA starting in the last bull year of each cycle (1988 and 2005). Here the black bars report % price changes in the 1988-1991 window, and the yellow bars % price changes so far since 2005, with the CME futures also included.

One striking point that comes out of this side by side comparison is how much sharper the onset of the current bear market in SFH prices has been relative to the last cycle (note that the comparison for condos would likely result in the opposite conclusion). Thus far the CME futures are not predicting anything like the severe price drops observed over the fall/winter of 1990-91. For reference, the light blue shading represents the early 90's recession which coincided with the depths of the bear real estate market. Given all the recent talk about recessions, it is interesting to ponder how the current cycle would fare in a similar scenario. It is also interesting to note that during the last bear market recovery, the yearly change in the Boston MSA CS Index did not exceed 5% until 1997, 5 years beyond the end of this plot. A long and slow recovery indeed.


kerpowski said...


In this post you state that while the SFH housing downturn would indicate that the current housing bear market is worse than the previous one the decline in condo prices would indicate the opposite. Do you have any data indicating why the condo market has been more resiliant so far than the SFH market?



walthamite said...

Thanks DT,

Always enjoy and appreciate your posts, so again thanks. Very interesting to compare the last price correction with this one. Obviously the assumption is that the last correction will provide us with insight into the current correction. But I'm not sure that's a reasonable assumption. There's only data for a single past correction to even compare with. Also, I'm reminded of attempts to time the stock market, which are notorious for failing even though an abundance of data exists for extrapolation. I'm beggining to think home prices are much like the NYSE, bound to rise over the long run, but in the short term completely random. I don't think anyone really knows what the DOW or Boston SFH prices will do this spring. One interesting lesson from the last housing boom was that even if home prices drop another 5% this summer, they could just as easily shoot up 15% the year after. These wide swings seem to make home purchasing a lot like maret timing. Too bad there's not a way to cost dollar average when buying a home, you're all in or nothing.

Tyrone said...

Not sure if you're interested, but I found a story that is surpisingly similar to a raging story in CA. Here was my letter to the author of the story:
Miss Kratz,
I hope I'm wrong, but you might want to dig a bit into the subjects of your story, "$1,300...$2,000...there goes your mortgage"--Mr. Ricardo Sanon.

For starters, you should visit this site and read about Sharon Lewis. She was featured in a similar article by the LA Times. Turns out, she is a total fraud and criminal, and she's a real estate agent.

Returning to your story:
1) I can find no record of a home in Waltham, MA belonging to anyone by the last name of Sanon.

2) Performing a check of real estate licenses in MA, I find someone by the name of Ricardo Sanon. He is employed by Century 21. There is no picture of him shown at the Century 21 site, and he has no listings.

3) Performing a deed search in MA, I cannot find any associated with Ricardo Sanon.

The similarities between the Sharon Lewis and Ricardo Sanon stories is striking.
Anyway, don't know if you dig into mortgage fraud, but it was fascinating to dig into this character.

indigo said...

DT: What a treat. Now that you have uncovered this striking analysis, could I suggest something more? The great thing about these (thinly traded) futures is that their prediction changes in time -- in a sense they have `momentum.' While I am very weary of pork belly traders identifying shoulders and what not, I would imagine that this same analysis done a month ago would predict a much shallower bear market.

Could we ask you to provide us with dynamical updates of these plots. This could be an interesting measure of the change in the derivative.

Thanks as always

Fritz said...

Indigo, contact TFS for their weekly TFS Housing Metrics report. The 1 year forward view as expressed by CME housing futures are dynamically charted. See also.

DT said...

I wasn't in the area during the last donwturn, I'm basing my comments on anecdotes I've head about major drops in condo prices that investors suffered in the late 80's/early 90's. Not sure what is different this time, and I certainly don't have any data. Ideas?

walthamite - I'm not sure I agree. My interpretation of the data is that the housing market is the proverbial "supertanker." Once it turns, it stays turned for some time. Doesn't mean it is easy to time the turn, but I don't think we'll see a 15% up year for a long, long time. When the market went south in 1989/90, it took ~7 years for a 5% up year!

Indigo- thanks for the suggestion. I started logging the CME futures a couple weeks back with the same idea, and will put together a post with this info sometime reasonably soon.

Tyrone- Sad to say that I'm not surprised about potential fraud in the RE market. Much like the NASDAQ bubble, the unwinding of the RE Bubble will reveal a host of unsavory characters, unscrupulous behavior, and outright criminal acts.

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Jackie O'Brien said...

Great comparison of data for the Massachusetts housing and real estate market. It's incredible how far it's come, but we're seeing some fantastic data right now especially in my area, which is Wellesley & Weston.

I wanted to mention that if anyone is interested in Wellesey & Weston real estate, whether it's for buying, selling, or just for some detailed market information I would recommend visiting Teri Adler's website. It's a fantastic local resource that will have all of the information you're searching for.

Just my two cents, thanks for the post!