Posted by: jhamon | July 22, 2009

Housing Bounce Here? Caveat Emptor…

LAS VEGAS - FEBRUARY 24:  Homes are seen Febru...

My friend Doug forwarded this gem along to me, written by John Burns of John Burns Real Estate Consulting.  (If you’re not interested in real estate, press fast forward now).  Bottom line – any perceived bounce is an artifact of the way in which data is collected:

Policy Makers, CEOs and Investors Beware

Recent reports of price appreciation are comparing apples and oranges.

We are extremely concerned that policy makers, banking and real estate industry executives, investors and others will use misleading home price data to conclude that home prices have stabilized. They have not.

These same influencers used this data in 2006 and 2007 to make decisions, many of which have proven to be poor decisions. It was a tough lesson, and hopefully one that won’t be repeated.

This is a complex issue. Here is why:

Reported home prices and home price indices rely on a small sample of transactions that represent far less than 1% of the owned homes in an area. The rise of subprime-related loans in 2004, and the subsequent foreclosures since then, has skewed the price data significantly.

There are many issues associated with the price data, including heavy discounts on distress sales. Because the bulk of the transactions since 2004 have also been in lower-priced neighborhoods, the following has resulted:

Recently reported median prices have been lower than the true value of the median home in the market, resulting in reported prices today that are far less than the value of the median home in an area.

Case-Shiller and other indices have been misinterpreted. They reported a higher percentage appreciation than occurred on most homes in 2006, and more price depreciation than has occurred on most homes since that time because their sample size is based on what has been transacting.

Transactions have predominantly been limited to homes in lower-priced neighborhoods. The Case-Shiller and Zillow tiered price indices show this clearly, but this granular detail is usually too much for most news articles.

Today, we are seeing the mix of transactions shifting back to the typical neighborhood. That mix shift is causing the median price to increase when, in fact, there is no real price appreciation going on.

Our analysis of 390 metro areas across the country shows that the percentage of markets reporting a month-over-month increase in the median price has jumped to 39% from 22% two months earlier. What is really happening is that people are now comparing the price on a 3-bedroom home in a typical neighborhood to the price on a 3-bedroom home in a poor neighborhood – because that’s what was selling several months ago.

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