Wednesday, September 26, 2012

Update on the Goldman housing index

Back in April, we discussed a very simple US housing market index developed by Goldman. The index basically looks at the percentage of US zipcodes that have experienced housing price appreciation (see discussion). Here is an update. Currently roughly 50% of zipcodes in the US are reporting price appreciation - which is still below the lows of the 1982 and the 1992 recessions. However as a comparison, the index was at 20% at the end of Q1. Note that the temporary spike in 2010 has to do with First-Time Homebuyer Credit program.

Source: GS

As expected, housing price appreciation is held back by distressed sales. The bifurcation of the distressed and the non-distressed markets (discussed here) is slowing the overall market improvement. Those areas with the largest declines in distressed sales saw the largest increases in prices.

Source: GS

This tells us that as we work through the distressed home inventory - which is happening fairly quickly (see discussion), prices should stabilize further.
GS: - ... distressed transactions, including bank real estate owned (REO) sales and short sales, play an important role in the current housing market. In earlier research, we estimated that the declining fraction of distressed sales during the recovery process has contributed materially to recent national house price movements. ... we confirm this finding using regional data. Among the Case-Shiller 20 cities, areas that had severe housing downturns but saw significant declines in the number of distressed sales over the past year -- Detroit, Las Vegas, and Phoenix -- also experienced higher price appreciation this year. Once the housing market fully recovers and the fraction of distressed sales returns to historical normal levels, the impact of the distressed/non-distressed mix on house price growth rate will dissipate. In the near-term, however, we still face a large distressed sales pipeline. This, coupled with investors bidding up REO properties in REO-to-rental programs and banks increasingly resorting to short sales (which has a smaller price discount) rather than REO sales to dispose distressed properties, suggests that house prices will continue to increase even with little improvement in the fundamental economic underpinnings.
... the recent strength observed in the housing market could also be related to "pent-up" demand coming back to the market. From 2007 to 2011, falling home prices and subsequent deterioration in the economic outlook may have caused many potential homebuyers to wait on the sideline.  [see this discussion on house price appreciation no longer strongly tied to the economy]
And once again, this has little to do with QE3 and low mortgage rates - the market is driven by completely different dynamics.
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