The Office of the Chief Economist of Freddie Mac issued its monthly economic
outlook for July on Monday and, in the narrative provided a helpful
analysis of the reasons for the confusing messages emerging from various
reports on current house prices.
The outlook states the obvious; the housing market has cooled abruptly after
several years of superheated activity and the slowdown in sales and increasing
backlogs of unsold houses are threatening to undermine not only property values
but also sectors of the broader economy. Yet various economic indicators are
pointing in different directions when it comes to housing prices.
Each of the reports that the housing industry, the stock market, and the media
relies on has advantages. One example is the timeliness of the data. The two
reports that come out monthly, shortly after the books are closed on the previous
month's sales are summaries of new home sales issued by the U.S. Census
Bureau and the report on existing homes from the National Association of Realtors®.
While timely, capturing the previous month's activity within weeks, the
numbers are easily influenced by where the sales took place. A sudden surge
of sales in Indiana, for example, will cause the median price of a home to drop
while a strong month in the Boston area will have the opposite effect. An influx
of first-time buyers into the market in a given month will also cause median
prices to trend downward. Most recently (May) these two monthly reports showed
a 0.9 percent decline in the sale price of new homes and 2.1 percent in the
median price of existing homes.
Other reports overcome this problem by reporting on same house sales. This
would include the quarterly report by the Office of Federal Housing Enterprise
Oversight (OFHEO) which uses data collected from Freddie Mac and Fannie Mae
to track houses across the years as they are sold or refinanced and Freddie
Mac's Conventional Mortgage Home Price Index (CMHPI) which does not include
refinancing in its analysis of same home purchases over time. While these studies
yield more apples-to-apples comparisons the OFHEO report tends to miss trends
because appraisal values upon which refinances are based tend to lag behind
actual prices and both OFHEO and CMHPI exclude a large portion of the market
which falls outside of Freddie Mac and Fannie Mae maximum loan limits. The most
recent of these studies for the first quarter shows a slight increase in prices
from the same period a year earlier with the CMHPI posting a gain of 2.8 percent.
The other major study is the Standard & Poors/Case-Shiller® National
Home Price Index. This is also a repeat sale comparison but it covers the higher
priced loans, government insured loans and privately financed purchases that
are outside the purview of the two secondary market reports. But nobody is perfect
and Case-Shiller is limited geographically because many areas, even whole states
are not included because of limited home sale data. This index may also reflect
trends in top-end housing markets that diverge from conventional financing and
may give more weight to higher priced regions. The most recent Case-Shiller
reported 1.4 percent decline in housing prices in the first quarter of 2007
compared to the same period in 2006.
The July Economic Outlook, however, concludes that the differences among the
various studies should not make people overlook the similarities. "All (the
studies) show that national price growth has shifted down from the double digit
gains of 2004-2005 to something near zero with several markets down from a year
ago." The studies have magnified regional disparities but property values in
most areas are still well above the levels or two or three years ago.
The narrative concludes by saying that "while a steady job
market and growing national economy may help limit the downside risks to housing
prices, several risks - the elevated levels of homes for sale, recent increases
in mortgage rates, and rising foreclosures of subprime borrowers - point to
continued weakness in the months ahead."
Where the particulars of the statistical portion of the outlook are changed
this month they are changed dramatically from the forecast for June. Major deviations
from the last outlook include the predictions for home sales which are now projected
at 6.23 million units (annualized) for the second half of the year and 6.28
million for the entire year. The year long figure was estimated at 6.41 million
units one month ago.
Predictions for national home price appreciation for the year,
projected at 1.5 percent last month is now at 1 percent and the growth estimate
for next year has decreased from 2.5 percent to 1.8 percent.
Mortgage activity has dropped from a forecast of $2.79 trillion
in June to $2.75 trillion based on fewer home sales, slower growth in home prices,
and rising interest rates. Refinancing is expected to represent 42 percent of
total mortgage activity this year, the lowest percentage in seven years and
outstanding mortgage debt is projected to grow by 5.9 percent this year, the
slowest growth in over a decade.