The Office of Federal Housing Enterprise Oversight (OFHEO) released its quarterly report yesterday, showing that appreciation growth in the second quarter was up only 1.17% from the first quarter- the slowest gain since 1975. Arizona’s gain was 2.94%.
The OFHEO report is considered more reliable than either average or median home prices, as it measures same house sales. According to the James B. Lockhart, Director of the OFHEO:
These data are a strong indication that the housing market is cooling in a significant way. Indeed, the deceleration appears in almost every region of the country.
Also from the report:
Possible causes of the decrease in appreciation rates include higher interest rates, a drop in speculative activity, and rising inventories of homes. "The very high appreciation rates we’ve seen in recent years spurred increased construction," said OFHEO Chief Economist Patrick Lawler. "That coupled with slower sales has lead to higher invenories, and these inventories will continue to constrain future appreciation rates."
According to CNNMoney:
The release from OFHEO said that appreciation in many states declined dramatically and the largest effects were felt in states that had experienced the greatest increases in recent years, such as Arizona and Florida.
"Of the seven states that saw more than 80 percent appreciation over the 2001-2005 period," read the report, "only Rhode Island’s appreciation rate has increased over the last year. The remaining markets experienced rapid decelerations."
Being able to look at the percentage of appreciation is a useful tool for determining market trends. Here’s what it can show you, that just looking at the sales numbers can’t.
Let’s start by looking at a graph of the median sales price in the Phoenix metropolitan area since January 2004:
These numbers are used by some to try and demonstrate that prices have "stabilized." However, the median does not tell the whole story. The median, rather than being an average, is the number that is the "middle" of the range. Half the homes lie either above, or below this number. As first time buyers have dropped out, and as larger homes have been purchased by "move up" buyers, in some instances, square footage prices have come down. That’s why the median price is not as good an indicator as same house sales.
The median however, can be useful to some degree. This chart shows the percent change in median prices for the same time period:
Sales levels typically decline after Labor Day, and the Valley continues to experience as inventory remains at record high levels. It seems unlikely that appreciation rates will recover anytime in the near future.
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Debi -
Ben’s bearpit had a long discussion on this topic yesterday. Their poster “deb” made one very valid point that we should take note of (uppercase emphasis in the original).
As we have also noted here, the Alt-A/sub-prime private label mortgage world expanded during the bubble. They now appear to be like the bigger underwater part of the iceberg, largely escaping scrutiny because the privates aren’t as forthcoming with their data.
I am not sure of the actual data sources or limitations but the OFHEO purports to look at repeat sales and refinancings involving 30 million transactions over a 30 years period. For the 5 or 6 SMSAs I am familiar with the results apppear congenial. Results also appear directionally consistant with the National City/Global Insight Valuation studies that are best of class work in the area (Nat. City studies tend to exclude refinancing data when looking at OFHEO data). Once again Twist has done a great job getting relevant information out to her readers. The good news is that if the OFHEO is right and average appreciation in the Phoenix SMSA was 100.61% over the past five years, nominal prices can fall by 20% and still yield a 10% annual return to the owners. Great return, especially if the gain is largely tax free because of tax code subsidies for home ownership. As that famous British Philosopher Mick says: “you can’t always get what you want, but..”
John-
The OFHEO does have it’s limitations, along with median price, etc.- that’s why the research scientist in me says there is no substitute for good field work.
What I am seeing in the field, checking out the builders, and talking with industry people, is that appreciation has already gone negative here in Phoenix- it’s a matter of trying to quantify that.
Hopefully as we continue to look at all the different measures available to us, we will be able to judge to some extent, the depth and rate of the decline. It would be a mistake to put all of our confidence in any one measure.
Debi -
Point taken.
John (sitting in the basket of his hot-air baloon peering at the ground through the fog)
IMHO, the big question is whether we start seeing a cycle of depreciation or just slowed appreciation. These charts seem to show that the median prices are increasing a a “normal” rate of 5%. Given that there are few valid reasons for the rapid appreciation over the past few years and last year in particular, I can only wonder whether a correction is in order or slowed growth. I know those who most benefit from the current pricing (i.e., realtors, mortgage brokers, appraisers, etc.) want to at the very least maintain the current pricing levels.
But and in the end, I’ve heard too many stories about realtors refusing to submit below-market offers, realtors refusing to list below-market listings, first-time investors buying with no or little-down interest-only loans, and out-of-state investors buying multiple homes in developments while counting on 20%-30% annual gains. I even know of someone having given up an earnest deposit to a homebuilder because the homebuilder dropped the list price of their model $70,000 in the past year.
Now, we’re seeing substantial inventories, astonishing vacancy rates among the houses that are on the market, yet pricing remains well above it’s levels from two years ago. I’m also tired of hearing people explain that our market isn’t overpriced, California is….
All I can ask is how can’t the bubble burst?
Scott C, Great questions! I am sure no expert but I believe that twist and john are right, and the bubble is already hissing. How prices change will largely depend on where you are and what your looking at. Predicting price changes is always dicey but I believe a return to normal could involve a return to prices when the value/price balance last existed in that particular market, plus a reasonable appreciation rate since that time. Using a source I like alot (Nat. City/Insight,supra.),for example, the Las Vegas market changed from slightly undervalued to slightly overvalued by 1st quarter 2004. By the end of 1st quarter 2006 it was 41.8%overvalued. To determine a “normal” and “fair” price I would look at a 2004 sale price (or good 2004 comps) plus 8 to 10% per year as a generous proxy for “normal” appreciation. In other markets, like Lincoln NE, a very stable and proximate relation between price and value has been maintained from 2002 to 2006, so arguably there is no bubble to burst. As to when the asking prices will change, in some areas the listings are so swollen with property “for sale” only if the owners can exchange the $400K track home they bought in 2003 for $950K that a very large part of the MLS is not seriously in play. To be fair to these people, the change in market conditions has been fairly rapid and they haven’t all had the benefit of twist and john’s good advice.In a market I’ve been interested in recently, when you look only at group of select vacant homes built since 2000 and originally priced to April/ March comps, I’ve seen alot of 5% to 10% reduction in asking prices in the last 45 days. While this is not a scientifically valid study, it may be some of that “field work” twist referenced. Given that this particular market was 42.9% overvalued ist quarter 2006, they have a way to go, but it looks to me like serious sellers are beginning to respond. As for the stubborn sellers who decide to just continue to live there rather than take 10% per year, so be it. In some markets the apparent cost of being a stubborn seller are very high (Fla taxes and insurance), in others low (Phoenix), and we can expect the higher incremental cost markets to adjust more rapidly I think. I call it the “apparent cost” because the real cost in a declining market is the apparent cost plus the ride down in price, just like stockholders refusing to sell at a profitable market price and then riding their holdings down in a declining market. One of the more successful, honest and experienced real estate agent I know told me in April that, for the first time in her 25 year carreer,she had no real firm grasp on what a house would sell for in a Fla. market that had experienced Phoenix like “appreciation”. So even the experts are shaking their heads. Hope this helps. Its a very scary “buyer’s market” in some places.
don’t forget the pricing numbers being reported are bogus and a big lie. They don’t take into account incentives, which are now massive and widespread, therefore they have no credibility, period.
keith – housingpanic
Twist, John & Scott, . A very interesting review of recent price changes in one of America’s most overheated markets is at http://www.naplesinsider.com While I recognize the marketing aspects of the site, the candor on the pricing info, if not the conclusions, is unusual.
When the ARM’S start adjusting in 2007 we shall see which markets are the most inflated.
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H**boy
Thanks H**boy-
Both for your comment and the self-edit. You make an old fashioned prude very happy.