Single Family Months for Sale

Before 2000, the NAR only publishes inventory data on Single Family Sales. Here is the data going back to June 1982 when the NAR started publishing the data. Clearly, they must have started to publish the data back then due to the large levels of inventory. The current level of months of inventory is not that high historically, but high relative to the period 1995-2005 when the housing market was on the way up. Also, we should note that most of the inventory in the early 1980s was occupied housing, while now there is a lot more vacant housing.

Uff da! Minneapolis and Changing Seasonality in House Prices

Tommorrow we get the latest data on nominal house price growth, both the Standard and Poor's Case-Shiller index and the Federal Housing Finance Agency. One series in particular to pay attention to is the Minneapolis series from Case-Shiller. What makes Minneapolis so interesting? In July it recorded its highest monthly growth rate ever, growing 4.8% from June to July. That was better than any month during the boom. See figure one. Even more interesting is that the growth in July came just four months after the worst month ever for Minneapolis, a negative 5.9% in March. To restate that, this year Minneapolis has seen both its worst and best month of nominal house price growth in the Case-Shiller index (the data for Minneapolis starts in 1989). Uff da!

Even more striking, is that dismal March for Minneapolis is the worst month ever for all of the cities for all of the months in the Case-Shiller index. Yes, March 2009 Minneapolis takes the title for worst Case-Shiller month. But the 4.8% in July 2009 is also one of the best. Only Phoenix June '05 (4.9%), a rogue July '88 in San Diego (5.3%) and Las Vegas from March '04 to July '04 (all above 5.0% with a peak of 6.0% in June '04). In other words, not only has Minneapolis gone from its worst month to its best in a span of 4 months, it has gone from the worst ever across all cities to one of the best ever for all cities! Uff da! For sake of comparison, figure two plots nominal house price growth for both Minneapolis and Las Vegas. The current seasonal cycle in Minneapolis is similar in magnitude to the boom and bust we saw in Las Vegas. Of course the Las Vegas cycle was longer so it has had a much larger impact on the house price level.

Why such a big change in house prices? Lars at the diner in Lindstom would shrug it off and say, `Oh, that's the snow, everyone knows that.' Lars is very likely correct. Inspection of figure one suggests that there has been an increase in the seasonality of house prices in Minneapolis. To get around the problem of seasonality in house prices most data is typically deseasonlized. Figure three plots the raw data (blue line) and the seasonally adjusted (black line) data for Minneapolis. Clearly, the seasonal adjustments are not fully accounting for changing seasonality.

The insufficiency of the seasonal adjustments leaves a problem. Due to increasing seasonality we cannot distinguish whether the high growth in Minneapolis house prices is due to snow or due to a recovery.

As I will show in the next post, the increasing seasonality is a problem for most cities in the Case-Shiller sample. (This appears to be due to most seasonal adjustments smoothing the seasonal factors, more on this in another post). This is making it very hard for us to distinguish whether prices are really rising, or we are just observing an artifact of increasing seasonality. This is why examining Minneapolis house price growth over the next few months is important. It will be the best data to disentangle the recovery from snow.

FHFA: House Prices for August 09

This morning the FHFA released their House Price Index for August 2009. They showed an decrease from July to August of 0.3%. The previously reported increase of 0.3% from June to July was unchanged. That means that the downward revision I had expected did not happen. As I showed in my earlier post, the initial estimate of monthly house price growth had been biased up by 0.22%, so i expected that the initial 0.3% growth from June to July could be revised down. This did not happen.

As I show in figure one, since December 2008, nominal house prices have risen 0.2%. Also shown in figure one, just using the headline initial monthly estimate we would believe that house prices have risen 2.6%, an overstatement of 2.4%. Using the August report, the initial monthly index for the house price index is on average biased up by 0.21%, a slight improvement over the previously found estimate of 0.22% using the July report.

Also included in the FHFA's August report, they now state that house prices are now 10.7% below their April 2007 peak. The latest fall in house prices is a bit surprising, but month to month numbers do not provide much information. Next month we will receive the report for the third quarter of 2009--that will contain a lot more accurate information.

FHFA Prices: Will they be revised down?

Tomorrow morning at 10 am est, the FHFA will announce their monthly house price index for August. As I reported earlier, their headline growth rate has been biased up by 0.22% on average. Last month, the FHFA reported that house prices increased 0.3% from June to July. If the bias holds true, then we can expect that the August report will include a revision to the July growth, revising the growth down from 0.3% to something between 0.0% and and 0.1%. I'll report back tomorrow with their release.

Monthly FHFA House Prices are Irrationally Exuberent: Headline Growth Rate Overstates Year-to-date Growth by 2.4%

On September 22nd, the Federal Housing Finance Agency (FHFA) released the July 2009 monthly housing price index with the headline “U.S. Monthly House Price Index Estimates 0.3 percent price increase from June to July.” Such headlines are fueling optimism that the housing market and the economy are turning a corner. However, in the text of the announcement we learned that the previously reported increase of 0.5% from May to June was revised down to 0.1%. Combining the two effects, house prices actually fell 0.1% relative to what was previously reported. The downward revision is not new for the FHFA monthly price index. In fact, if you only read the headline monthly growth rates, you would be under the impression that house prices have risen 2.9% so far this year through July. In fact, in the latest report, house prices had only risen 0.5%. In other words, the headline monthly house price growth gives the impression that house prices have grown 2.4% more this year than they actually have.

The FHFA monthly house price index is new, only having been reported for 20 months. In the FHFA’s original analysis of the potential revisions to their monthly index (reported in the second quarter 2007 release) they stated the initial monthly estimate `would not be reliable’ and did not bother to even report the magnitude of the revisions in their analysis. This unreliable estimate is now the headline of their monthly release. We should not overly criticize the FHFA. The initial monthly index does provide information, explaining roughly 84% of the movements in house prices (in an R-squared sense).


To put the revisions in context, suppose instead that the FHFA was a stock broker handling your million dollar portfolio, and he called you up to tell you the news on your portfolio for July. The conversation could have played out like this:

BROKER: Great news, your portfolio is up 0.3% June to July.

YOU: Great, combined with the 0.5% from May to June, I’ve earned $8,000 the past two months. Maybe I’ll start thinking about getting the deck redone on my house.

BROKER: Yes, about that 0.5%, we re-estimated the increase from May to June to be only 0.1%, so that you actually have only earned $4,000 the last two months. Sorry.

I think most people with a million dollar portfolio would not like to frequently have such conversations with their stock broker. However, for the past twenty months that the FHFA (formerly OFHEO) has been reporting the monthly house price index, the FHFA has been regularly having just such conversations with Americans regarding their houses.

I do research using the quarterly house price index from FHFA. I know that this index states that house prices are down for the year, but it seemed to me that the monthly index had been reporting prices increases from month to month. I went back and checked the headline growth rates, here they are, stating the date reported along with the relevant period for the index:

• March 24: “1.7% increase from December to January”
• April 22: “0.7% increase from January to February”
• May 27: no headline, part of quarterly report. Reported change from February to March is 1.1% decrease
• June 23: “0.1% decline from March to April”
• July 22: “0.9% increase from April to May”
• August 25: no headline, part of quarterly report, in the text the FHFA states that the “monthly index for June rose 0.5%”
• September 22: “0.3% increase from June to July”

If you add up all of the growth rates, you arrive at a year-to-date growth of 2.9%. In fact, prices have only rise 0.5%. Furthermore, the 0.5% is most likely overstated as the 0.3% reported from June to July is likely to be revised down. Figure one plots the perceived series for house prices relative to December 2008 if one accepts the headline growth rates as the truth, showing an increase of 2.9%. Figure one also reports the current path for house prices relative to December 2008. Clearly the headline growth rate overstates the actual growth. So far, the overstatement has been 2.4% for 2009.

To put the FHFA’s revisions back into the context of a stock broker managing a million dollar portfolio, if you just looked at the headline growth (maybe in the subject line of a monthly e-mail) you would think that you had earned $29,000 so far this year. You could be thinking about making a large transaction such as renovating a bathroom. However, when you actually looked at your most recent statement, you’d see that you were in fact only up $5,000 so far this year.

The FHFA only started reporting the monthly house price index on February 26, 2008 as part of the report for the 4th quarter of 2007, giving us an observation for December 2007. Since then, we have received 20 observations in total (including Dec 07). Figure two plots the initial estimated price growth along with the current estimate for price growth. There is a clear bias down in the revision. Figure three plots the error in the initial estimate, given by the difference between the initial and the current. Once again there is a clear bias in the revision. Not including the latest observation, the initial estimate overstates the growth rate of house prices by 0.22% on average. This amounts to an annual overstatement of 2.68%.

Before the FHFA started reporting the monthly price index, in their Second Quarter 2007 report, released on August 30 2008, they performed an analysis of revisions. In their analysis they state (see page 11 of the report):

“A primary concern with the construction of monthly price indexes is that revisions will tend to be large. …the most recent monthly price measures would seem to be particularly susceptible to later revision. A June index estimate and the corresponding May-June appreciation rate estimate would be prone to the greatest revision, and a review of the evidence suggests that the estimates would not be reliable.”

To analyze the revisions, they compare their estimate in the second quarter 2007 release with an estimate only using date through the first quarter of 2007. When they do this analysis they do not show the error for March 2007! They leave it out, stating “the line only extends through February 2007 because the data submission only included data through March, and—as indicated above—the index point for the latest month (March) is not deemed to be reliable.”

In other words, from their analysis they deemed the first estimate unreliable and not worth even making an analysis of the size of the revisions. This estimate that `would not be reliable’ is the estimate that they currently report in their monthly release. But not only do they report it, they make it their headline!

Before we overly criticize the FHFA, they have put out many warnings in the text of their announcements. When the monthly house price index was first released as part of the fourth quarter 2007 report (release on Feb. 26, 2008) they warned “index users should recognize that, while OFHEO’s initial review suggests that revisions may be reasonably small, this is no guarantee that future revisions cannot be significant.” They also made a warning for the January 2009 report—which ended up being the largest revision to date—stating that due to a low sample size that “the estimation imprecision associated with the January estimate is relatively large and subsequent revisions … could be significant.”

The initial monthly estimate does provide information. As the then OFHEO director James B. Lockhart stated in the release with the first monthly index “Given the recent turmoil in the housing markets we thought it would be helpful to provide a greater amount of information about price trends.” The FHFA has succeeded along this dimension. Inspection of figure 2 shows that, although there is a bias in the initial estimate, it does provide information about the final estimate. The R-squared of the fit of initial to the final (through June 2009) is 0.84. Therefore, the initial does provide more information about the price trends in the housing market.

Last, there have only been 20 observations of the initial monthly estimate. In addition, theses twenty observations have covered a period of unprecedented falling house prices and very low level of sales, especially considering that the FHFA’s data only starts in 1991. With such a small sample over observations that are so unprecedented, it is difficult to say definitively that the initial estimated is biased. Furthermore, large revisions consistently in one direction are not surprising.

The main problem with the overstatement in the initial monthly estimate is that the FHFA is using the initial estimate as their headline. Given that the FHFA stated in their own analysis that this estimate ‘would not be reliable’, they may want to think about not using this observation as their headline. Instead they could go with the change in the year-over-year or use a more descriptive headline like they use for the quarterly report.

Another Article About Falling Rents

Marketwatch has an article providing anecdotal evidence that the high rental vacancy rates are putting downward pressure on rents:

Why you should ask for lower rent

As I have been saying, the downward pressure on rental rates will last for sometime, keeping downward pressure on all nominal prices.

Beveridge Curve and New Census Data: Owner-Occupied Market near Equilibrium, Rental Market Not

Recently, the census bureau released its latest figures on the housing stock, now updated to the second quarter of 2009. Interestingly, the vacancy rate for the owner-occupied market fell to 2.5% from 2.8%, but it rose to 10.7% in the rental market, a 40 year high. To shed some more light on the new census data, below, I redo the analysis in my "Beveridge Curve" paper which provides a quantitative measure of oversupply, or disequilibrium in the housing market. The main finding is that the owner-occupied market is almost back to equilibrium, in my opinion, a quite strong observation that the owner-occupied market has reached bottom. However, the overall housing market is still suffering from oversupply, with most of the oversupply residing in the rental market. This further supports what my research has been suggesting: a significant adjustment mechanism for the housing market is the shift of housing from the owner-occupied market to the rental market. I expect rents to continue to fall, putting downward pressure on the CPI. My hunch is that for the next several years multi-unit housing starts will remain depressed while the rental market corrects itself. Read on for the updated analysis.


Figure 1 plots the updated time series for the vacancy rates. In addition to the owner-occupied and rental vacancy rates, I provide a total vacancy rate, which provides the vacancy rate for the overall market, irrespective of ownership. We can see that the total vacancy rate has been flat of late, roughly at the all time high since the data started in 1965, while the owner-occupied rate has fallen and the rental vacancy rate has increased.


The census data also informs us about the rate of household formation, and how the rate of household formation is allocated across renters and owners. Figure 2 plots the rate of household formation for owners, renters, and total households irrespective of tenure status. Due to the noisiness of the data, I use the % increase in households over the past 8 quarters and report the rate of change at an annual frequency. In my opinion figure 2 is one of the most striking pictures of the housing bubble. We see quite clearly the shift in owning starting around 1995, and then the dramatic shift to renting starting around 2005. In fact, the first quarter of 2006 was the first observation where the previous two years had more growth in renters than owners since the last quarter of 1994! Even more striking, for the first time since Census began this series in 1965, the growth rate of owners has been roughly zero for the past two years.

My research suggests that there is a negative relationship between the rate of household formation and the vacancy rate. This is true in the owner-occupied market, the rental market, and the total market irrespective of ownership. I call this relationship the Beveridge Curve in the Housing Market, and it can be thought of as a long-run supply relationship. For a deeper analysis of the Beveridge curve see my earlier posts here and here or read the academic paper.


The most interesting aspect of the research is that the deviations from the Beveridge curve give us an estimate of the magnitude of the disequilibrium in the housing market. I can do this for the owner-occupied market, the rental market, or the total market irrespective of ownership. The result for the owner-occupied market is shown in figure 3, the units are in a % of the total housing stock. We can see quite clearly the oversupply that resulted from the bubble, peaking at 0.49% of the total housing stock in the fourth quarter of 2006. However, the market has been quickly correcting itself, now standing at 0.10% of the total housing stock. The correction in the owner-occupied market stems from two adjustments: (1) the growth rate of owners has fallen, now being consistent with the high vacancy rate; and (2) the number of units in the owner-occupied market has been falling, due to less construction and a shift of units to the rental market. I expect that these trends are still continuing, so that sometime in the next year the owner-occupied market will actually shift to a state of undersupply.

However, the picture is much different in the total housing market. Figure 4 shows the oversupply in all three markets: owner-occupied, rental, and total market irrespective of ownership status (the rental market reported here is simply the residual between the total market and the owner-occupied market—the independent estimate of the rental market implies an even larger oversupply in the rental market). Here, we can see that the total market still is far from equilibrium, with an oversupply of 0.89% of the total housing stock. However, this is down from the peak of 1.18% in the second quarter of 2006. Therefore, while the owner-occupied market is almost back to equilibrium, the overall market still has a large oversupply. Almost all of the oversupply is showing up in the rental market. Clearly, we are seeing the market respond by shifting resources from the owner-occupied market to the rental market. This will undoubtedly put pressure on rents to fall as has been recently reported. I expect rents to continue to fall for quite some time, putting downward pressure on the CPI.

Punchline: the market is adjusting, which means the owner-occupied market clears while the rental market holds the oversupply. The owner-occupied market has probably already moved back into a state of equilibrium, while the total market will slowly reach equilibrium as the production of primarily multi-unit rentals remains sluggish for several years.