April 20, 2024

Off the Charts: Studying Housing Through Distorted Indexes

The Federal Housing Finance Agency reported this week that its national index of home prices fell 2.5 percent in the first quarter, or 9.6 percent at an annual rate.

That was the sharpest decline for any quarter since 2008, at the worst of the credit crisis.

“In the last two or three quarters, we have seen a deterioration,” said Andrew Leventis, a senior economist at the agency. “This is probably due to the homebuyer tax credit going away.” That credit, worth up to $7,500 for first-time homebuyers, ended Sept. 30.

The agency’s index of home purchase prices peaked in the first quarter of 2007, later than some other home price indexes. Since then, the national index has fallen in every quarter.

The index is based on sales whose mortgages are guaranteed by either Fannie Mae or Freddie Mac, the two government-sponsored enterprises that are regulated by the housing finance agency.

The top chart in the accompanying graphic shows the quarterly changes in the national index from 2000 through the first quarter of 2011. It shows a strong market early in the decade that went into overdrive in 2004 and 2005, only to plunge thereafter.

Over the four years since the peak, the national index has fallen 19.3 percent, including a 5.5 percent fall over the most recent four quarters. Such a fall would mean that an average home purchased in the first quarter of 2007, with a 20 percent down payment, would now be worth little more than the amount borrowed. Many homes, of course, have fallen much more than the average.

The charts also show state indexes, with the worst performance since the peak in Nevada, where prices are down by more than half. Houses in Arizona, California and Florida have lost more than 40 percent of their value.

There is some reason, however, to think that the recent price declines may be overstated by the index. The figures are based on sales of the same home over time, but there is no way to measure changes in the quality of a home.

With many homes now being sold in distress, either because of foreclosure or as “short sales” in which the sales price is below the amount owed and all the proceeds go to the lender, it is likely that some of the homes were in poor condition. In addition, such sales are often made for lower prices than comparable homes could obtain if sold without time pressures. If and when nondistress sales become a larger part of the market, that could cause the index to rise even if the overall market is not getting stronger.

For smaller states, the accuracy of the figures may suffer from having a relatively small number of transactions on which to base the index. The states with the fewest sales are noted in the chart.

The housing finance agency also maintains indexes that are based on both sales and appraisals used in refinancings. Those indexes show smaller declines over the last year in some states, with prices in Idaho, for example, off just 9.1 percent rather than the 15.7 percent fall recorded in the purchase-only index, and Hawaii’s decline at 1.4 percent, far less than the 8.7 percent decline shown.

But while using refinancings provides more data, it may also provide its own distortion. The only homes that can be refinanced now are those that are worth more than the amount owed on the existing mortgage, and thus are likely to have held their value better than many others.

Floyd Norris comments on finance and the economy on his blog at nytimes.com/norris.

Article source: http://feeds.nytimes.com/click.phdo?i=bd91946ef6e7ed94c02ad7388a2e4e61

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