"In a falling market, with an enormous number of properties for sale, the houses that are selling tend to be more appealing than the average house.
"We're dependent on houses that are actually transacting," said Patrick Lawler, the chief economist at the oversight agency, which is known as Ofheo. "It's true that may not evenly reflect the market."
Can somebody who has never had appraisal training please explain this point to me? I'm already on my second pot of coffee, but maybe someone put decaf in my cupboard when I wasn't looking.
PS: When did the bleeding NYT decide that OFHEO is Ofheo?
The NYT is spot on in that assessment that in a rising inventory environment the cream of the crop sells and will make prices look better. Eventually the pack will have to lower prices to generate demand. I think we'll see the first signs of this in the spring market when all those folks who thought spring would be their savior will find out the reverse.
Tanta, I think we're talking about rehabs and builder incentives. In older, downtown markets (say, Baltimore) you have alot of rehabs being sold and not many fix-er-uppers being sold. The find 'em, fix 'em up and sell 'em crowd descended in huge nubmers in alot of neighborhoods. Even if they're selling these houses at a markup from what they paid, they're still losing money because of their investment in fixing them up. And of course they don't have money anymore to repeat and buy another fixer-upper. With new houses, we have builder upgrades, like the ubiquitous granite countertops, keeping the selling prices relatively flat, even as that effectively lowers the equivalent selling price for houses without those improvements. These both have the net effect of changing the mix of housing selling and propping up the median price while the selling price today for a house bought today would be less than it sold for last year.
Since July, (12) homes have been listed within 6 blocks of my house. So far one closed in November for 450K, the competition is mid-550K to 625K. Other then price I doubt if this home is much different then the others, since its a typical calif ranch stucco track development built in 65.
Tanta, I'm not sure I agree with Jim a's assessment of the NYT's piece. The way I read that I think they are in effect saying that "Because of the buyers-strike and dropping sales volumes, we are not seeing an even spectrum of sales across all categories. This means that the statistics are skewed because only the real steals and jaw-droppers are selling, while the vast majority in the middle are languishing on the MLS listings."
Jim, you're saying that in the existing home market, the exit of the flippers means that fewer sales occur but more in the higher price end than the bottom end, so that mean/median prices can appear more stable than they actually are. Is that right? Your point about new homes is true except it doesn't affect OFHEO because OFHEO is repeat transactions on existing homes, not new home purchases.
Andrew, I guess my trouble is that the NYT piece keeps switching back and forth from "price" to "value." For instance, the general definition of a "real steal" is a price less than the presumed market value. The market value in a declining market is . . . what a declining number of buyers who are generally less motivated than sellers will pay for it, assuming transparent information, rational agency and no drugs in the water supply. The phrase "more appealing" seems (?) to imply that the houses with more "intrinsic value" are selling while those that merely have "market value" are not.
Here's another way of looking at it: everybody wants to use OFHEO purchase-only numbers because of the assumption that refinances inflate the numbers. Would it help if we postulated that the most valuable/appealing/amenity-laden properties are being refinanced more often than the boring ones? If you believe the statistics for the amount of MEW going to "home improvement," you might conclude that refi appraisals aren't inflated, they are just overrepresented by people who have substantially improved their properties since the original purchase.
I'm trying not to think like an appraiser but it isn't working.
Part of the problem with paired house sales is the timing. When a market is sinking rapidly, tracking two sales for one house misses the cusp. It's works exactly the same way as smoothing the data over months.
They usually throw out really quick sales and foreclosures, too, and in this environment, those are a lot of what is selling in some areas.
The discrepancy the NY Times notes is really a product of the very rapid shift in the marketplace. The data will catch up with reality.
Right. And it is hard to find comparable sales in a slow market. Thus appraisers are wont to make more than the usual number of adjustments to comparables for things like amenities, location, size, etc. Lord knows RE appraisal isn't an exact science, and there are plenty of fraudulent appraisers out there, but I just think this issue can be exaggerated.
there's nothing fancy about appraisals. i've done a # with several lenders and the formula is simple. pull up comparable sold houses in the last 12 months within 1 mile that have a similar lot size and square footage.
"And it is hard to find comparable sales in a slow market." Tanta, I think most people would agree with the idea that the market is changing and going through an inflection point.
My guess is that stability has gone out of the market (to paraphrase Alan Greenspan on the typically unhappy end to periods of stability) and the buyers, sellers, appraisers, OFHEO et al. are having to deal with the fact that all their Magic 8-Balls are telling them "The answer is fuzzy, try again later" and are scrambling for data to help guide them or support their assertions.
It may be stating the obvious (I will fully admit that I'm a novice on the subjects of economics, finance and housing statistics compared to others on this board), but I'm also guessing we will see even more price instability before it all smooths out and the statistics can reliably tell us which way the market is trending.
The comments about prime properties selling may be related in some way with comments made by an atlanta realtor AKA Sonnypage, about the prime properties selling in a down market while the average sits.
His quote is
In a soft market, marginal listings become flotsam and debris.
Meaning that in a soft market the marginal property owners will not sell at market while the prime properties will because in an up market the non prime folks overpaid while in a down market the prime properties tend to hold more of their top price and thus sell.
No Andrew, we know it's going down. The argument is by how much, and the fact that leading edge price stats show a much higher drop than lagging price stats simply tells us that it went down quickly.
Real estate stats lag, and paired house measures are the most accurate way to measure pricing over time, but their great fault is that you have to wait for a long time to get that accuracy of measurement.
Comparable sales lag too. Most good appraisers will note that it's a falling market on an appraisal because of that.
As recently as 2000, there were just 719,000 such loans outstanding, about 2.4 percent of all mortgages, according to data from the Mortgage Bankers Association of America. By the end of June, though, subprime loans had reached 5.7 million, or 13.4 percent of the total. More than half are adjustable-rate mortgages, compared with just 18 percent for prime loans.
In sheer numbers, roughly 350,000 subprime loans were seriously delinquent at the end of June, over six times the number at the end of 2000
Two of the most mismatched quotes from the article:
We all should be proud as an industry, Michael W. Perry, chairman and chief executive of IndyMac Bank, a lender in Pasadena, Calif., told his peers at the Mortgage Bankers Associations annual convention in Chicago recently. We have created an enormous amount of wealth for Americans.
David Rose, director of research and training at the National Training and Information Center in Chicago, said he had been struck by the growth in adjustable-rate lending to the elderly and low-income borrowers who are least able to adjust to higher payments. Thats where the product makes the least amount of sense, he said.
Just came from the rubber chicken run at the 43rd Annual Economic Forecasting Luncheon in Pahoenix.
All was just fine with the audience nodding right along with the national economy soft landing.
Last Speaker is a guy named Elliot Pollack- a local real estate economist for over 20 years. Theme:
Take two asprin and call me in '08.
Cratering is the only word to describe the market after the bubble.
Single family housing permits down 57.8% YOY through September, resale housing, down 32% has reverted to a "normal" year like 2002. Upshot of the deal, light is on the horizon due to population growth in Arizona, but the overhang of specvestor and builder specs will take two years to absorb, even with the plummeting permit pipeline. Commercial is ok as they are still behind in following the houses to the new subdivisions, and their build cycle is skewed. Condo conversions artificially tightened the apartment uptake to look positive by removing units, but the upshot is probably negative. The audience kind of sat there stunned and then lurched for the exits.
Reminds me of the Dec 2001 one where the "All is well, the fed is pumping" was the theme. We now have to deal with the aftermath of that fiasco...
Thanks MaxedOutMama, after re-reading my last post I realize it sounded a bit obnoxious (Sorry about that Tanta) and that was not what was intended. Lack of sleep and no coffee are probably to blame. As I stated before I am a bit of a novice in the areas of economics and the mortgage arcania. This has left me feeling a bit like a duffer runner that happened to fall in with a bunch of serious marathoners; scrambling and learning fast. I'll try to think twice THEN post next time.
I see what you meant about the leading and lagging indicators and how paired sales are the best indicator, but flawed in that they seriously lag the market. I think I was simply trying to point out that the leading indicators are probably going to continue to be fuzzy for a while because of the long period of house price stability or rising stability that we have enjoyed and the resulting instability now hitting the market as we transition through being in an up market to a down market.
"PS: When did the bleeding NYT decide that OFHEO is Ofheo?"
From the NYT style guide (1950): "when an abbreviation has become a recognized word and is pronounced as a word, points [periods] are omitted, and only the first letter is capitalized in reading matter."
Now, go out and try using "ofheo" in casual conversation.
People who won't use a serial comma can't be trusted.
I think the problem of selection bias cut both ways. During the boom, larger more expensive houses were probably turning over faster. Probably in part due to trade ups and flippers. The flippers probably really skewed the numbers during the good times.
Ultimately I think you have to look at levels of purchase activity, such as the MBA index of mortgage apps for purchases. Home price appreciation is a tough statistic to get right.
Don't worry Tanta, I'll keep at it. As I said earlier, I'm an engineer by training and that is a profession where part of why you get paid is to be a Doubting Thomas and dig into the numbers to see what is really going on. Unfortunately because of this engineering also is not known for attracting the most politic of people.
I continue to appreciate your dilligence with those details vfsv.
About the feeling (women, you know what I'm talking about: intuition) that the stats reflect only the transacting market: the high-end, the spiffy, the ones repleat with the granite countertops even in the doghouse --not the modest abode, so neat and tidy. Just plain. And, well, my dog refuses to go near that neighborhood.
So it's a surprise that there is not a glut of 'entry level' (starter)[palatial quasi-mobile home] dwellings (single detached family residences) in the current transacting market?
I would have thought that given where the money is and where the money isn't, that this would not have been a surprise. So where does the wealth gradient fit into this possibly skewed housing picture (possibly perfectly reflecting wealth picture)? Is Lord sorta on base, suggesting that we should examine square footage?
FI-fee-ack
O-FAY-o
and the Federal Housing Finance Board
FUHF-ba
I don't think anyone's quite gotten the point about the bias in the OFHEO index in a down market. It isn't expensive vs. cheap properties, but the first derivative with respect to time (to get all calculus on you), appreciating vs depreciating properties. Size matters for a NAR index, appreciation matters for an OFHEO index. Imagine, if you will, the following.
Times are normal. Average appreciation in an MSA is 4%. Half of the ZIP (yes, ZIP is an acronym - the Zone Improvement Plan, if you must know) codes are hot, with 6% appreciation, and half are cool, with 2% appreciation. 100 properties per year sell in each. The OFHEO index will show 4%.
Instead, the MSA is going to hell in the proverbial handbag. Half the ZIP codes are falling at 1% per year, while the other half are falling at 19%, so on average the MSA is falling by 10%. If sales dry up in the ZIPs that are falling fast, but not in the ZIPs that are falling a smidge, so that there are 100 sales per year in the -1% ZIPs and 0 sales in the -19% ZIPs, then the OFHEO index will show a fall of only 1%. This is an incredibly extreme example - not the 1%, 19% part - I think that you actually do see that kind of variety across neighborhoods when things are tanking, but the 100 to 0 sales part of the example is extreme. Even in the hardest hit ZIP codes there are some sales in the beginning, and of course eventually there will be lots, bringing down the index. But you might easily see sales stay at 100 in the relatively healthier neighborhoods, and fall from 100 to 30 or 40 in the bust areas. That shifting of the weights in the index will bias the index up in the early part of a collapse, and will catch up eventually.
Of course, it is also true that newspapers are good at finding extreme cases. If prices fell 10% in Naples, you can count on a newspaper interviewing someone with a property that fell 25%, and finding the one broker in town who'll say the sky is falling. They hyped on the way up, and they'll hype on the way down.
Andrew - that is sort of like 'measure twice, cut once'. That might work fine in a sunny location but here in Minnesota, where I live, we like the measure once real sloppy, then cut, cut, cut strategy. We got wood stoves to feed, people to keep warm.
(What I'm saying is shoot ideas out freely here - that is what a forum like this is all about - sure you'll get hazed at times but that's what the stove is for.)
OFHEO is a staggered lagging measure that is comparable to using a rolling (but unevenly weighted) average of many years. A house sold today was on average bought seven years ago. We can accurately calculate the average annual price change for the seven year period. But, what portion of the measured change is attributable to the latest 12 months? It should not be one seventh of the seven years. The problem is compounded if the direction of prices has changed.
The OFHEO index will not (cannot?) show strong price movement until the direction of prices has persisted for several years.
I believe that OFHEO is accurate in the long run, but very inaccurate in the short run. If you want to compare 2006 to 1986 is very good. If you want to compare 2006 to 2005 you should use another index.
OFHEO is an excellent measure over long time horizons but may not be sufficiently sensitive for rapid price movements.
Because OFHEO aggregates by MSA, and both transaction volume and price volatility may be uneven within an MSA, OFHEO's averages may distort what is happening in the slowest ZIPs in the MSA.
The probability that at least one commenter will assume this is an example of the government cooking the books for some nefarious purpose approaches one.
The probability that an NYT reporter will confuse the "X number of transactions over Y period of time" problem with the "average quality of sold homes versus average quality of listed but unsold homes" problem is one.
Since items 1 and 2 are potential, not inevitable, problems, we must rely on either alternative data series or anecdotal evidence to test the theory that prices are moving faster than OFHEO can capture with repeat transactions or that ZIPs or census tracts within MSAs are so uneven with respect to transaction volume that OFHEO is understating something in the short term.
The usefulness of the analysis indicated by item 5 will be in inverse proportion to the amount of time spent complaining that this makes OFHEO worthless.
The FHLBB will always be Philly Bob to me. I prefer OFF-hee-oh to Oh-FAY-oh, because I prefer "Hee-oh, hee-oh, it's OFF-hee-oh we go" to whistling Dixie.
Bailey, "Tanta" is my nephew's misspelling of the Danish "tante," or "aunt." Therefore it should be T.A.N.T.A., the Woman From. But I'm lazy about periods and wary of TV jokes that make me sound old.
I'm actually trying. CR sent me a bunch of homework yesterday (ahem) to which I will attempt to direct my attention this afternoon. This morning I have to go see a nurse about a needle. I never fail to get certain points.
"In a falling market, with an enormous number of properties for sale, the houses that are selling tend to be more appealing than the average house.
"We're dependent on houses that are actually transacting," said Patrick Lawler, the chief economist at the oversight agency, which is known as Ofheo. "It's true that may not evenly reflect the market."
Can somebody who has never had appraisal training please explain this point to me? I'm already on my second pot of coffee, but maybe someone put decaf in my cupboard when I wasn't looking.
PS: When did the bleeding NYT decide that OFHEO is Ofheo?
The NYT is spot on in that assessment that in a rising inventory environment the cream of the crop sells and will make prices look better. Eventually the pack will have to lower prices to generate demand. I think we'll see the first signs of this in the spring market when all those folks who thought spring would be their savior will find out the reverse.
Tanta, I think we're talking about rehabs and builder incentives. In older, downtown markets (say, Baltimore) you have alot of rehabs being sold and not many fix-er-uppers being sold. The find 'em, fix 'em up and sell 'em crowd descended in huge nubmers in alot of neighborhoods. Even if they're selling these houses at a markup from what they paid, they're still losing money because of their investment in fixing them up. And of course they don't have money anymore to repeat and buy another fixer-upper. With new houses, we have builder upgrades, like the ubiquitous granite countertops, keeping the selling prices relatively flat, even as that effectively lowers the equivalent selling price for houses without those improvements. These both have the net effect of changing the mix of housing selling and propping up the median price while the selling price today for a house bought today would be less than it sold for last year.
Silicon Valley housing stats look more an more as though "someone" has an agenda.
The latest snaposhot is now published at:
http://www.viewfromsiliconvalley.com/id284.html
Since July, (12) homes have been listed within 6 blocks of my house. So far one closed in November for 450K, the competition is mid-550K to 625K. Other then price I doubt if this home is much different then the others, since its a typical calif ranch stucco track development built in 65.
Tanta, I'm not sure I agree with Jim a's assessment of the NYT's piece. The way I read that I think they are in effect saying that "Because of the buyers-strike and dropping sales volumes, we are not seeing an even spectrum of sales across all categories. This means that the statistics are skewed because only the real steals and jaw-droppers are selling, while the vast majority in the middle are languishing on the MLS listings."
Jim, you're saying that in the existing home market, the exit of the flippers means that fewer sales occur but more in the higher price end than the bottom end, so that mean/median prices can appear more stable than they actually are. Is that right? Your point about new homes is true except it doesn't affect OFHEO because OFHEO is repeat transactions on existing homes, not new home purchases.
Andrew, I guess my trouble is that the NYT piece keeps switching back and forth from "price" to "value." For instance, the general definition of a "real steal" is a price less than the presumed market value. The market value in a declining market is . . . what a declining number of buyers who are generally less motivated than sellers will pay for it, assuming transparent information, rational agency and no drugs in the water supply. The phrase "more appealing" seems (?) to imply that the houses with more "intrinsic value" are selling while those that merely have "market value" are not.
Here's another way of looking at it: everybody wants to use OFHEO purchase-only numbers because of the assumption that refinances inflate the numbers. Would it help if we postulated that the most valuable/appealing/amenity-laden properties are being refinanced more often than the boring ones? If you believe the statistics for the amount of MEW going to "home improvement," you might conclude that refi appraisals aren't inflated, they are just overrepresented by people who have substantially improved their properties since the original purchase.
I'm trying not to think like an appraiser but it isn't working.
Part of the problem with paired house sales is the timing. When a market is sinking rapidly, tracking two sales for one house misses the cusp. It's works exactly the same way as smoothing the data over months.
They usually throw out really quick sales and foreclosures, too, and in this environment, those are a lot of what is selling in some areas.
The discrepancy the NY Times notes is really a product of the very rapid shift in the marketplace. The data will catch up with reality.
I meant "It works". Ack. Great shame.
Right. And it is hard to find comparable sales in a slow market. Thus appraisers are wont to make more than the usual number of adjustments to comparables for things like amenities, location, size, etc. Lord knows RE appraisal isn't an exact science, and there are plenty of fraudulent appraisers out there, but I just think this issue can be exaggerated.
It would help it they reported size and cost per square foot as well.
there's nothing fancy about appraisals. i've done a # with several lenders and the formula is simple. pull up comparable sold houses in the last 12 months within 1 mile that have a similar lot size and square footage.
"And it is hard to find comparable sales in a slow market." Tanta, I think most people would agree with the idea that the market is changing and going through an inflection point.
My guess is that stability has gone out of the market (to paraphrase Alan Greenspan on the typically unhappy end to periods of stability) and the buyers, sellers, appraisers, OFHEO et al. are having to deal with the fact that all their Magic 8-Balls are telling them "The answer is fuzzy, try again later" and are scrambling for data to help guide them or support their assertions.
It may be stating the obvious (I will fully admit that I'm a novice on the subjects of economics, finance and housing statistics compared to others on this board), but I'm also guessing we will see even more price instability before it all smooths out and the statistics can reliably tell us which way the market is trending.
The comments about prime properties selling may be related in some way with comments made by an atlanta realtor AKA Sonnypage, about the prime properties selling in a down market while the average sits.
His quote is
In a soft market, marginal listings become flotsam and debris.
Meaning that in a soft market the marginal property owners will not sell at market while the prime properties will because in an up market the non prime folks overpaid while in a down market the prime properties tend to hold more of their top price and thus sell.
The fact that OFHEO doesnt look at the whole mortgage market just the non-jumbo market makes it useless for California
Or in other words, in a down market people only buy what they are willing to live in for a long time.
In a up market, they'll take what they can get.
In a down market they'll only take what they truly want.
No Andrew, we know it's going down. The argument is by how much, and the fact that leading edge price stats show a much higher drop than lagging price stats simply tells us that it went down quickly.
Real estate stats lag, and paired house measures are the most accurate way to measure pricing over time, but their great fault is that you have to wait for a long time to get that accuracy of measurement.
Comparable sales lag too. Most good appraisers will note that it's a falling market on an appraisal because of that.
Dear CR
Wondering if you had seen this article on sub-prime market from the New York Times (Subprime Loans Going From Boon To Housing Bane; Minority Buyers Especially Hurt As Interest Rates Adjust Higher - NY Times ) on the sub-prime mortgage market. It had some interesting observations:
As recently as 2000, there were just 719,000 such loans outstanding, about 2.4 percent of all mortgages, according to data from the Mortgage Bankers Association of America. By the end of June, though, subprime loans had reached 5.7 million, or 13.4 percent of the total. More than half are adjustable-rate mortgages, compared with just 18 percent for prime loans.
In sheer numbers, roughly 350,000 subprime loans were seriously delinquent at the end of June, over six times the number at the end of 2000
Two of the most mismatched quotes from the article:
We all should be proud as an industry, Michael W. Perry, chairman and chief executive of IndyMac Bank, a lender in Pasadena, Calif., told his peers at the Mortgage Bankers Associations annual convention in Chicago recently. We have created an enormous amount of wealth for Americans.
David Rose, director of research and training at the National Training and Information Center in Chicago, said he had been struck by the growth in adjustable-rate lending to the elderly and low-income borrowers who are least able to adjust to higher payments. Thats where the product makes the least amount of sense, he said.
Regards
Just came from the rubber chicken run at the 43rd Annual Economic Forecasting Luncheon in Pahoenix.
All was just fine with the audience nodding right along with the national economy soft landing.
Last Speaker is a guy named Elliot Pollack- a local real estate economist for over 20 years. Theme:
Take two asprin and call me in '08.
Cratering is the only word to describe the market after the bubble.
Single family housing permits down 57.8% YOY through September, resale housing, down 32% has reverted to a "normal" year like 2002. Upshot of the deal, light is on the horizon due to population growth in Arizona, but the overhang of specvestor and builder specs will take two years to absorb, even with the plummeting permit pipeline. Commercial is ok as they are still behind in following the houses to the new subdivisions, and their build cycle is skewed. Condo conversions artificially tightened the apartment uptake to look positive by removing units, but the upshot is probably negative. The audience kind of sat there stunned and then lurched for the exits.
Reminds me of the Dec 2001 one where the "All is well, the fed is pumping" was the theme. We now have to deal with the aftermath of that fiasco...
Thanks MaxedOutMama, after re-reading my last post I realize it sounded a bit obnoxious (Sorry about that Tanta) and that was not what was intended. Lack of sleep and no coffee are probably to blame. As I stated before I am a bit of a novice in the areas of economics and the mortgage arcania. This has left me feeling a bit like a duffer runner that happened to fall in with a bunch of serious marathoners; scrambling and learning fast. I'll try to think twice THEN post next time.
I see what you meant about the leading and lagging indicators and how paired sales are the best indicator, but flawed in that they seriously lag the market. I think I was simply trying to point out that the leading indicators are probably going to continue to be fuzzy for a while because of the long period of house price stability or rising stability that we have enjoyed and the resulting instability now hitting the market as we transition through being in an up market to a down market.
Real estate investing was once THE best investment. Guess the party's over, at least for now.
e.g., Long periods of stability lead to periods of instability that are longer than people expect as things sort themselves out.
Andrew, I didn't think you were being obnoxious.
Of course, I didn't think I was being tedious, either. Consider the source.
Never let yourself get intimidated by "experts." The story of the bubble is a story about how full of raw sewage so many experts were . . .
"PS: When did the bleeding NYT decide that OFHEO is Ofheo?"
From the NYT style guide (1950): "when an abbreviation has become a recognized word and is pronounced as a word, points [periods] are omitted, and only the first letter is capitalized in reading matter."
Now, go out and try using "ofheo" in casual conversation.
People who won't use a serial comma can't be trusted.
I think the problem of selection bias cut both ways. During the boom, larger more expensive houses were probably turning over faster. Probably in part due to trade ups and flippers. The flippers probably really skewed the numbers during the good times.
Ultimately I think you have to look at levels of purchase activity, such as the MBA index of mortgage apps for purchases. Home price appreciation is a tough statistic to get right.
Mama, I just tried it in Word. OFHEO is OK, but the spelling borg doesn't like "Ofheo." It suggested "Ohio."
What I want to know is how the NYT pronounces FFIEC.
Moopheus. Not Mama. I'm an IDIOT.
Don't worry Tanta, I'll keep at it.
As I said earlier, I'm an engineer by training and that is a profession where part of why you get paid is to be a Doubting Thomas and dig into the numbers to see what is really going on. Unfortunately because of this engineering also is not known for attracting the most politic of people. 
I continue to appreciate your dilligence with those details vfsv.
About the feeling (women, you know what I'm talking about: intuition) that the stats reflect only the transacting market: the high-end, the spiffy, the ones repleat with the granite countertops even in the doghouse --not the modest abode, so neat and tidy. Just plain. And, well, my dog refuses to go near that neighborhood.
So it's a surprise that there is not a glut of 'entry level' (starter)[palatial quasi-mobile home] dwellings (single detached family residences) in the current transacting market?
I would have thought that given where the money is and where the money isn't, that this would not have been a surprise. So where does the wealth gradient fit into this possibly skewed housing picture (possibly perfectly reflecting wealth picture)? Is Lord sorta on base, suggesting that we should examine square footage?
Andrew, I didn't think you were being obnoxious!
FI-fee-ack
O-FAY-o
and the Federal Housing Finance Board
FUHF-ba
I don't think anyone's quite gotten the point about the bias in the OFHEO index in a down market. It isn't expensive vs. cheap properties, but the first derivative with respect to time (to get all calculus on you), appreciating vs depreciating properties. Size matters for a NAR index, appreciation matters for an OFHEO index. Imagine, if you will, the following.
Times are normal. Average appreciation in an MSA is 4%. Half of the ZIP (yes, ZIP is an acronym - the Zone Improvement Plan, if you must know) codes are hot, with 6% appreciation, and half are cool, with 2% appreciation. 100 properties per year sell in each. The OFHEO index will show 4%.
Instead, the MSA is going to hell in the proverbial handbag. Half the ZIP codes are falling at 1% per year, while the other half are falling at 19%, so on average the MSA is falling by 10%. If sales dry up in the ZIPs that are falling fast, but not in the ZIPs that are falling a smidge, so that there are 100 sales per year in the -1% ZIPs and 0 sales in the -19% ZIPs, then the OFHEO index will show a fall of only 1%. This is an incredibly extreme example - not the 1%, 19% part - I think that you actually do see that kind of variety across neighborhoods when things are tanking, but the 100 to 0 sales part of the example is extreme. Even in the hardest hit ZIP codes there are some sales in the beginning, and of course eventually there will be lots, bringing down the index. But you might easily see sales stay at 100 in the relatively healthier neighborhoods, and fall from 100 to 30 or 40 in the bust areas. That shifting of the weights in the index will bias the index up in the early part of a collapse, and will catch up eventually.
Of course, it is also true that newspapers are good at finding extreme cases. If prices fell 10% in Naples, you can count on a newspaper interviewing someone with a property that fell 25%, and finding the one broker in town who'll say the sky is falling. They hyped on the way up, and they'll hype on the way down.
I'll try to think twice THEN post next time.
Andrew - that is sort of like 'measure twice, cut once'. That might work fine in a sunny location but here in Minnesota, where I live, we like the measure once real sloppy, then cut, cut, cut strategy. We got wood stoves to feed, people to keep warm.
(What I'm saying is shoot ideas out freely here - that is what a forum like this is all about - sure you'll get hazed at times but that's what the stove is for.)
They hyped on the way up, and they'll hype on the way down.
That is a given.
OFHEO is a staggered lagging measure that is comparable to using a rolling (but unevenly weighted) average of many years. A house sold today was on average bought seven years ago. We can accurately calculate the average annual price change for the seven year period. But, what portion of the measured change is attributable to the latest 12 months? It should not be one seventh of the seven years. The problem is compounded if the direction of prices has changed.
The OFHEO index will not (cannot?) show strong price movement until the direction of prices has persisted for several years.
I believe that OFHEO is accurate in the long run, but very inaccurate in the short run. If you want to compare 2006 to 1986 is very good. If you want to compare 2006 to 2005 you should use another index.
I think the NYT wants to set up the headline "Ofheo Negro" for when things turn even darker.
What I have learned today:
Tanta, or is it TANTA? GLAD YOUR BACK! p.s. take cr up on his offer, it's time.
Bailey, "Tanta" is my nephew's misspelling of the Danish "tante," or "aunt." Therefore it should be T.A.N.T.A., the Woman From. But I'm lazy about periods and wary of TV jokes that make me sound old.
I'm actually trying. CR sent me a bunch of homework yesterday (ahem) to which I will attempt to direct my attention this afternoon. This morning I have to go see a nurse about a needle. I never fail to get certain points.
Such a delight, no prollies about it. But did I learn anything?
Not that I dare enumerate.