Why the Housing Market “Crisis” Isn’t

Dr. Stanley D. LonghoferOctober 2, 2007

Some Scary Housing “Facts”

New and existing home sales are “plummeting” while inventories are “through the roof”

New home construction has “come to a standstill”

Foreclosures are “skyrocketing” Home prices are “in a freefall”

Why Do We Care?

Macroeconomic impact of housing Determine what is happening to my

personal housing investment Should I buy or sell? What is happening to the value of my house?

Remember: No one owns Remember: No one owns the average U.S. homethe average U.S. home

Home Sales are Down

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

1985 1990 1995 2000 2005 2010

Existing Home Sales

Year-over-year Percentage Change

Sources: NAR; U.S. Census Bureau

NewHome Sales

Inventories Are Up As Well

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1990 1995 2000 2005 2010

Existing Homes

Months Supply (SA)

Sources: NAR; U.S. Census Bureau

NewHomes

Home Sales: The Real Story

New and existing home sales have fallen and this is a nationwide phenomenon The rise in inventories is largely due to the

decline in sales, not an up-tick in new listings Question: Why are sales falling while the

overall economy is still fairly strong? Real GDP growth was up 3.4% in 2007Q2 Unemployment was 4.6% in August

What about Construction?

New home construction has fallen sharply as well, no matter how you measure it Building permits Housing starts Completions

This is of more concern, because it represents real economic activity, not simply the transfer of existing assets

Are Foreclosures Skyrocketing?

Ignore foreclosure reports that use data from RealtyTrac The areas covered by these reports change

from month to month, making comparisons over time meaningless

The “good” foreclosure and delinquency data are compiled by the Mortgage Bankers Association of America

Severely Delinquent Loans

0.01.02.03.04.05.06.07.08.09.0

10.011.012.013.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

All Loans

Percent of Loans Serviced

Source: MBAA

Prime Loans

Subprime Loans

2% of all loans

14% of all loans

3% of all loans

The Foreclosure Debacle?

If it were not for two problem areas, foreclosures nationwide would have fallen in the 2nd quarter A regional recession in the rust belt Four states with a high percentage of investor

loans: Arizona, California, Florida, and Nevada

Are Home Prices Falling?

It depends on whom you ask? NAR median sale price OFHEO house price index S&P / Case-Shiller house price index

U.S. House Price Appreciation

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

Year-over-year Percentage Change

Sources: NAR; S&P; OFHEO

S&P / Case-Shiller HPI

OFHEO HPI

NAR Median Price

Comparing House Price Indices

The drop in the NAR median sale price reflects fewer sales in high-priced coastal markets, not a decline in the value of any given house

The S&P index is constructed so that it emphasizes changes in high-end houses Centered on large, high-priced markets Includes very-high priced houses Value-weighted

OFHEO HPI by S&P Coverage

-2.0

0.0

2.0

4.0

6.0

2000 2001 2002 2003 2004 2005 2006 2007

Quarter-over-Quarter Percentage Change

Source: WSU Center for Real Estate, using data fromOFHEO and U.S. Census Bureau

States with Partial Coverage

States with Full Coverage

States with No Coverage

Comparing House Price Indices

Differences between the OFHEO and S&P indices gives us insight into what is really happening to house prices Appreciation in most markets nationwide has

slowed, but is still positive High-end homes in high-priced markets are

bearing the brunt of the downturn Even in these markets, prices are well above

where they were just three years ago

Comparing House Price Indices

100.0

125.0

150.0

175.0

200.0

2000 2001 2002 2003 2004 2005 2006 2007

Index: 2000Q1 = 100

Sources: S&P; OFHEO

OFHEO HPI

S&P U.S. HPI

A Housing Market Crisis?

New and existing home sales have fallen, but it is hardly the crash being portrayed in the media A self-fulfilling prophecy?

Foreclosure problems are fairly isolated House price appreciation has slowed, but

prices continue to rise most markets across the U.S.

A Housing Market Crisis?

From a macroeconomic perspective, there could hardly be a better time for a housing slowdown Interest rates are low Employment is growing, albeit slowly GDP growth is solid

Housing market statistics typically reflect what is going on in the overall economy, not the other way around

A Housing Market Crisis?

From a personal perspective, you should simply ignore what you hear about the housing market in the national media Focus on what is happening in your city or,

even better, your neighborhood

Wichita State University Center for Real Estate

Building a Vision for Real Estate in Kansas