Price Corrections Are Not As Bad As Reported
by John Burns
It is true that home prices have corrected more than any time in the past, and further price declines are likely. However, the methodology used to track home prices is overstating the actual correction. Some examples of reported overstatements thus far are a 36% decline in value in Sacramento, a 31% decline in Port St. Lucie, a 24% decline in Las Vegas, a 24% decline in Orange County, and a 20% decline in Tampa.
The problem is that there has been a tremendous shift in the activity of what is selling, which is impacting even the best price indices, such as Case-Shiller-Weiss. Here is what you need to know:
Small Sample Sizes: Home buying activity has plummeted, which has significantly reduced the sample size of what is selling. Our research shows that sales volumes have plummeted back to early 1990s levels in many areas of the country. A low sample size reduces the validity of the conclusions.
Dominance of Foreclosures: Today, the low sample size is dominated by foreclosures and short sales. In Sacramento last month, 65% of the sales volume was a foreclosure or short sale. Our research shows that foreclosure sales are heavily concentrated in certain submarkets, which is generally the poorer inner-city areas and the most outlying areas.
The Use of Median Prices: Median prices are the best measure to track because the median-priced home is the home where half of the homes sold are more expensive, and half are less expensive. In normal times, this home represents a 20-year-old, 1,600 square foot detached home in a typical suburb. Therefore, in normal times, comparing year-over-year price changes is relatively representative of most homes in the market. However, the median transaction today is more likely to be 1,400-square-foot, less desirable home in the inner city or a new home sold at auction.
Bigger Price Declines on Distressed Home Sales: The most sophisticated measures like Case-Shiller-Weiss only examine the price changes on the same home, so the mix shift is supposed to be eliminated. However, when more than 50% of the activity is a distressed sale, the median transaction is a home that was sold under duress and in a severely distressed neighborhood. This is not representative of the value of most homes in the metro area.
While the housing market and banking industry are under severe duress, it is important to know that most homeowners have not seen the decline in home value that is being reported in the newspaper. As always, we emphasize that the best decision makers use the most accurate information to make decisions.
