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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2009

Behind the Veil of Market Reports

Context is everything when attempting to make sense of monthly housing data

It seems as if every new day brings fresh headlines about the housing market. But there's more than meets the eye when it comes to economic indicators and our industry. Mortgage brokers should know where the data originate and what they mean -- and don't mean.r_2009-05_Cook_spot

News organizations typically cover reports about three categories of housing data -- existing homes, new homes and mortgages. Those reports often come from the following three types of organizations:

  1. Government agencies
  2. Private economic-consulting firms, which publicize their work to attract business
  3. Trade associations, which represent housing-sector-related industries

Each report helps us understand the marketplace. Each also has imperfections, which sound bites often magnify. Moreover, the long and harsh downturn in the real estate industry has clouded some of the key indicators of housing activity.

Viewed collectively through time, the historic collection of housing indices and reports elucidates a comprehensive picture of the market. Taken individually, however, each index is incomplete.

Here's how to understand them.

Numbers can mislead

Let's look at an example referring to the monthly existing-home-sales release from the National Association of Realtors (NAR), as reported in The New York Times this past Feb. 4:

"Enticed by tumbling housing prices, more Americans signed contracts to buy homes in December [2008] despite concerns about the economy, an industry group reported."

The NAR release includes several data points, including existing-home sales, existing-home prices and months' supply of existing homes. The information comes from a survey of activity on multiple listing services (MLSs), the databases of homes for sale that operate throughout the U.S.

Generally, the NAR survey is reliable and informative. It's compiled by a reputable organization and calibrated to reflect actual sales. Nonetheless, the association's existing-home-sales data comes from a survey of homes on MLSs -- not an actual count of all existing homes sold. Only homes listed through a member real estate broker appear on the MLS. That means that at least 12.5 percent of homes sold -- the approximate percentage of homes sold by their owner without professional representation -- aren't included.

This might not seem like a big deal. Your perspective could change, however, when you consider that NAR research shows that homes sold by their owners sell for 27 percent less on average than homes sold with an agent's help -- and that owner-sold homes are on the market for about half as long as agent-listed homes.

The association seeks to correct for owner-sold homes mathematically, but there's no way to know what's really happening with those sales. No one keeps comparable data.

On the Web

Q&A with Case-Shiller Home Price Index co-founder Karl E. Case.  

Additionally, in the aforementioned New York Times story, no one from NAR surveyed those buyers to discern if housing prices were the reason they decided to open up their pocketbooks in December. It makes sense that falling prices spurred sales, but no one can state definitively the correlation between falling prices and sales.

The fact is that causality in housing data is usually an interpretation created to give meaning to data. That interpretation, however, may or may not be accurate.

Timeliness matters

Data timeliness also can confuse many in the mortgage and real estate industries. For example, releases from the U.S. Commerce Department and NAR -- often made available within a week or two of each other -- can show dramatic differences in sales trends for new houses and existing houses, respectively. The reason for this is simple: The Commerce Department reports contracts, and NAR reports closings.

Because of inspections, appraisals, financing and other necessary occurrences, closings typically happen at least a few weeks after a contract is signed on an existing home. Those same occurrences, however, aren't generally needed for the sale of a new home. Thus, comparing the NAR and Commerce numbers can be misleading.

The glut of foreclosed properties and short sales -- as much as 45 percent of the market in some cases, according to NAR -- is another development impacting real estate statistics. Foreclosed-upon properties have markedly increased the inventory of homes available for sale, while foreclosed sales have increased the sales pace and lowered median and average sales prices. No matter how you look at it, foreclosure activity clouds the underlying supply-and-demand picture.

Another index feeling the housing downturn's effects is the Mortgage Bankers Association's Weekly Mortgage Applications Survey Purchase Index. Traditionally, this has represented a reliable indicator of future home sales. Recently, however, the fallout rate -- the rate of applications that don't make it to loan closing -- has been erratic and relatively high. Loan-documentation requirements, credit requirements, time lags and appraisal problems have significantly increased the number of borrowers who fail to move from the application stage to closing. Thus, an increase in the purchase index may not necessarily indicate an increase in future home sales.

Information can conflict

Perhaps the greatest confusion occurs when there's conflict among several indices that measure essentially the same thing.

The Case-Shiller Home Price Index, which tracks 85 cities, is one of the most-quoted price indices in the nation. But the most-widely circulated report of that index -- which comes through Standard & Poor's (S&P) -- reflects home-price changes in just 20 cities, as per (S&P) Standard & Poor's' license.

At the same time, two other median-home-price statistics -- NAR's and the Federal Housing Finance Agency's -- each measure more than 150 U.S. metropolitan areas. All three gauges measure home prices, but major differences in their findings can occur.

For example, the 20-city S&P Case-Shiller Home Price Index for November 2008 decreased 18.2 percent year to year, while the NAR median-existing-home-price index for the same period declined 13.2 percent.

When brokers look at these numbers and other figures that proclaim real estate and mortgage industry trends, they should understand that statistics need context, and local market characteristics often mean much more than wide-angle views.

•  •  •

As the nation's housing sector continues to struggle, mortgage brokers' ability to identify the turning point in the cycle -- to know when the recovery begins -- represents a crucial aspect of market planning. This knowledge is equally important for real estate agents, construction companies, hedge funds and investment funds with large amounts of money invested in the sector.

Brokers who can help themselves and others identify and comprehend market movements can better position themselves for success.


 


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