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House Prices and Fundamentals
Under the Microscope
Steve Oliner*
American Enterprise Institute and UCLA Ziman Center
Presented at Meeting of Collateral Risk Network
Washington, DCOctober 30, 2013
*This presentation describes work done jointly with Ed Pinto at AEI and Morris Davisat the University of Wisconsin.
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Part 1:
Setting the Stage
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House Prices: What Do We Know?
Housing busts can be very damaging to the economy and
financial system. Best to prevent them if possible.
House prices can stray from fundamentals (construction cost,
rent, income). Eventually correct back.
Risk varies over the cycle. Increases during the boom.
Land is the risky part of the housing bundle.
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Residential Land and House Prices
In recent cycle, land prices moved up and down much more than house prices.
Source: Nichols, Oliner, and Mulhall (2013).
0
50
100
150
200
250
300
0
50
100
150
200
250
300
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Residential land price index, 23 cities
Case-Shiller 20-city
house price index
Index, 2002:H2 = 100
Half-yearly
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Open Questions
How do land and house prices move within a metro area? Is
there a common spatial pattern across cities?
How does risk correlate with the size of the gap betweenhouse prices and fundamentals? Are there threshold effects?
What are the most effective ways for regulators to lean against
house price booms? Can simple rules work?
Micro data are important for addressing all of these
questions.
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This Study
Uses property-level data to pop the hood on housing valuation
within metro areas.
Focus on detached single-family homes.
Initial analysis for Montgomery County, MD.
Borders Washington DC.
Large, diverse county. About 1 million residents.
In the process of extending the analysis to 25 other counties in
10 metro areas.
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Part 2:
Data and Methodology
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Key Data Sources for Montgomery County
Property-level data
House characteristics, location, and AVM value: FNC, Inc.
Reconstruction cost as new: Marshall & Swift/Boeckh (MSB)
Zip-level data
House price indexes: FNC and Zillow
Construction cost indexes: MSB
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Creating Time Series
Roll the property-level AVMs back from 2013:Q3 to 2000:Q1
using FNC zip-level house price indexes.
Roll the property-level adjusted reconstruction cost back from
2013:Q3 to 2000:Q1 using MSB zip-level cost indexes.
For Montgomery County, almost all zips have same cost index
Back out implied land value for each property in each quarter.
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Part 3:
Results
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20837
20854
20874
20878
20871
20882, 21797
20838, 20839, 20841, 20842
20850
20904
20855
20906
20876
20872, 21771
20832
20853
20852
20902
20817, 20818
20868, 20905
20879
20815
20901
20814
20886
20910
20707, 20866
20903
20877, 20880
20912
20851
20777, 20833, 20860,
20861, 20862
20812,
20816
20895,
20896
20879
20879
20903
Percent
Less than 10*
10-20
20-30
30-40
More than 40
House Price Decline in Montgomery County, 2006-2012
Wide variation across zips. Smallest declines inclose-in areas, largest declines in outlying areas.
* Includes zip 20815, where index rose 7 percent.Source: Authors' calculations using data from FNC, Inc. 12
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House Prices in 20815 and 20903
Very different cycles in two zip codes less than 10 miles apart.
Source: FNC, Inc.
60
100
140
180
220
260
300
60
100
140
180
220
260
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
20815 -- Chevy Chase
20903 -- Silver Spring
Annual average
Index, year 2000=100
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20837
20854
20874
20878
20871
20882, 21797
20838, 20839, 20841, 20842
20850
20904
20855
20906
20876
20872, 21771
20832
20853
20852
20902
20817, 20818
20868, 20905
20879
20815
20901
20814
20886
20910
20707, 20866
20903
20877, 20880
20912
20851
20777, 20833, 20860,
20861, 20862
20812,20816
20895,20896
20879
20879
20903
Dollar per square foot
Less than 15
15-25
25-40
40-70
More than 70
Average Land Price in Montgomery County, 2013:Q3
Highest in close-in zips, with downwardgradient moving away from DC.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
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20837
20854
20874
20878
20871
20882, 21797
20838, 20839, 20841, 20842
20850
20904
20855
20906
20876
20872, 21771
20832
20853
20852
20902
20817, 20818
20868, 20905
20879
20815
20901
20814
20886
20910
20707, 20866
20903
20877, 20880
20912
20851
20777, 20833, 20860,
20861, 20862
20812,
20816
20895,20896
20879
20879
20903
Square feet
Less than 11,000
11,000-15,000
15,000-25,000
25,000-40,000
More than 40,000
Average Lot Size in Montgomery County, 2013:Q3
Largest in outlying zips, dropping toless than 1/4 acre in close-in zips.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
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20837
20854
20874
20878
20871
20882, 21797
20838, 20839, 20841, 20842
20850
20904
20855
20906
20876
20872, 21771
20832
20853
20852
20902
20817, 20818
20868, 20905
20879
20815
20901
20814
20886
20910
20707, 20866
20903
20877, 20880
20912
20851
20777, 20833, 20860,
20861, 20862
20812,
20816
20895,
20896
20879
20879
20903
Dollars
Less than 200,000
200,000-250,000
250,000-400,000
400,000-600,000
More than 600,000
Average Lot Value in Montgomery County, 2013:Q3
By far the highest in close-in zipseven though the lots are small.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
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20837
20854
20874
20878
20871
20882, 21797
20838, 20839, 20841, 20842
20850
20904
20855
20906
20876
20872, 21771
20832
20853
20852
20902
20817, 20818
20868, 20905
20879
20815
20901
20814
20886
20910
20707, 20866
20903
20877, 20880
20912
20851
20777, 20833, 20860,
20861, 20862
20812,
20816
20895,
20896
20879
20879
20903
Percent
Less than 35
35-45
45-55
55-65
More than 65
Average Land Share of Property Value in Montgomery County, 2013:Q3
Excceds 65% in some close-in zips, droppingto less than 35% in some outlying zips.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
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Land Prices over Time
For zips grouped by land price in 2013:Q3. Very large swing for low-price zips,much less for high-price zips.
0
20
40
60
80
100
120
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
More than $70/sf
$15-$25/sf
$25-$40/sf
$40-$70/sf
Less than $15/sf
Index, 2006=100
Note: Observations for 2013 represent average of Q1, Q2, and Q3.Source: Authors calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
Annual
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Prices and Construction Costs: 2000-2006
Land prices rose more than house prices everywhere, especially in zips with lowland prices. Construction costs accounted for little of the rise in house prices.
Source: Authors calculations based on data from FNC, Inc. and Marshall & Swift/Boeckh.
0
100
200
300
400
500
600
Less than $15/sf $15-$25/sf $25-$40/sf $40-$70/sf More than $70/sf
Zips grouped by land price in 2013:Q3
Land Price House price Construction cost
Percent change
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Prices and Construction Costs: 2006-2012
Land prices fell more than house prices everywhere, especially in zips with lowland prices. Construction costs continued to rise.
Source: Authors calculations based on data from FNC, Inc. and Marshall & Swift/Boeckh.
-70
-60
-50
-40
-30
-20
-10
0
10
20Less than $15/sf $15-$25/sf $25-$40/sf $40-$70/sf More than $70/sf
Zips grouped by land price in 2013:Q3
Land Price House price Construction cost
Percent change
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Land Shares over Time
For zips grouped by land price in 2013:Q3. Huge swing in land share for low-price zips, while share is much more stable for high-price zips.
Note: Observations for 2013 represent average of Q1, Q2, and Q3.Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
More than $70/sf
$15-$25/sf
$25-$40/sf
$40-$70/sf
Less than $15/sf
Annual
Percent
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2000-12 Cycle: House Prices Fell More in Zips
with Previous Large Rise in Land Share
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.
-50
-40
-30
-20
-10
0
10
10 15 20 25 30 35 40 45 50
Hous
e
price
change,
2006
to
2012,p
ercent
Maximum rise in land share from 2000 to any year through 2006, percentage points
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2000-12 Cycle: House Prices Fell More in Zips
with Previous Large Rise in Price-Rent Ratio
-50
-40
-30
-20
-10
0
10
60 70 80 90 100 110 120 130 140
Hou
se
price
change,
2006
to
201
2,percent
Maximum rise in price-rent ratio from 2000 to any year through 2006, index points
Source: Authors' calculations using data from FNC, Inc., Marshall & Swift/Boeckh, and REIS.
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2000-12 Cycle: House Prices Fell More in Zips
with Previous Large Rise in Price-Income Ratio
-50
-40
-30
-20
-10
0
10
40 60 80 100 120 140 160
House
price
change,
2006
to
20
12,percent
Maximum rise in price-income ratio from 2000 to any year through 2006, index points
Source: Authors' calculations using data from FNC, Inc., Marshall & Swift/Boeckh, and ScoreLogix.
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Metro Areas in Full Study
MSAs represent range of markets across the U.S.
Counties selected to capture range of experience within the
MSA. 26 counties in all.
Total population of selected counties: about 40 million
East Coast Far West Interior
Boston Seattle Chicago
Washington DC Los Angeles Detroit
Miami Phoenix Memphis
Oklahoma City
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Summary
Housing submarkets are important in Montgomery County.
House price swing was largest in outlying areas; it was muchsmaller in affluent, close-in areas.
Land prices were more volatile than house prices, especiallyin the outlying areas.
Rapidly rising land share was associated with sharp houseprice correction later on.
Results suggest that clearest signal about over-valuationcould come from developments in the outlying areas.
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