Transcript Wichita State University Center for Real Estate

Why the Housing
Market “Crisis” Isn’t
Dr. Stanley D. Longhofer
October 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
the average U.S. home
Home Sales are Down
Year-over-year Percentage Change
40.0
30.0
20.0
Existing
Home Sales
10.0
0.0
-10.0
New
Home Sales
-20.0
-30.0
1985
1990
1995
2000
2005
2010
Sources: NAR; U.S. Census Bureau
Inventories Are Up As Well
Months Supply (SA)
10.0
9.0
8.0
Existing
Homes
7.0
6.0
New
Homes
5.0
4.0
3.0
1990
1995
2000
2005
2010
Sources: NAR; U.S. Census Bureau
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
Percent of Loans Serviced
13.0
12.0
Subprime Loans
11.0
10.0
2% of
9.0
all loans
8.0
3% of
7.0
all loans
6.0
5.0
4.0
All Loans
3.0
2.0
Prime Loans
1.0
0.0
1998 1999 2000 2001 2002 2003 2004 2005
14% of
all loans
2006
2007
Source: MBAA
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
Year-over-year Percentage Change
25.0
20.0
NAR Median Price
15.0
S&P / Case-Shiller HPI
10.0
5.0
OFHEO HPI
0.0
-5.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
Sources: NAR; S&P; OFHEO
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
Quarter-over-Quarter Percentage Change
6.0
States with
Full Coverage
4.0
States with
Partial Coverage
2.0
States with
No Coverage
0.0
-2.0
2000
2001
2002
2003
2004
2005
2006
2007
Source: WSU Center for Real Estate, using data from
OFHEO and U.S. Census Bureau
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
Index: 2000Q1 = 100
200.0
S&P U.S. HPI
175.0
OFHEO HPI
150.0
125.0
100.0
2000
2001
2002
2003
2004
2005
2006
2007
Sources: S&P; OFHEO
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