Does the Federal HPI Underestimate Home Price Inflation?
(And do the Corresponding House Price Risk and Valuation Indices Incorporate that Error?)
Consumer Reports/Local Market Monitor,PMI Mortgage, and other companies publish indices that compare income in various metropolitan areas to the cost of homes there. In essence, these studies look at average home prices in these metro areas and compare them to incomes to see if they’re out of whack based on traditional income to price ratios. Think of pre-qualifying for a mortgage with your own personal income, except these indices try to pre-qualify the “average” person in town to buy the “average” house there.
The valuation/risk indices I’ve seen track home price inflation using the House Price Index from a federal agency called OFHEO, the Office of Federal Housing Enterprise Oversight:
http://www.ofheo.gov/media/pdf/4q05hpi.pdf
As I read it, OFHEO computes HPI by tracking repeat sales of a given APN. In other words, they keep records every time a specific parcel sells from one month or year to the next. When each parcel sells, their program looks back in time to compare the price the last previous time when that same exact parcel sold before. The percentage of increase or decrease for all sales in the area is then averaged to determine the change in the HPI there. It’s an amazing concept when you think of the sophisticated record keeping and correlation. Can anyone confirm this understanding of the HPI methodology? The notes in the OFHEO reports are not a model of clarity.
Here’s my concern with the OFHEO index as I read it. I gather that the HPI does NOT include homes purchased with Jumbo loans. Doesn’t that skew the bottom line and understate the house price inflation in transitional regions where many homes have jumped up recently from relative affordability (I said relative) to flat out exorbitant? That is, what if a large number of buyers are using Jumbo loans in a given town even though those same house were purchased with conforming loans the last time they changed hands? I realize that the Jumbo loan limits have increased, but have they kept pace?
If many homes have sold with conforming loans before, but Jumbo loans in the recent wildfire, then does the inflation for those specific homes just drop off the radar? Are the inflated prices for those transitional homes just trees falling in the forest? Bottom line, I wonder if the OFHEO index understates average house price inflation in these regions that have experienced fastest growth with many sales crossing over the Conforming/Jumbo threshold. For example, Sacramento – a red hot region – started out much more reasonable before the recent run up but has become very pricey. Is the official HPI there understated? Are there any real experts who can comment? Or am I just confused?
Sources include: LocalMarketMonitor.com, 70 Glen Road, Wellesley MA 02481, (781) 431-7151
posted by Garth Farkley at 5:28 PM
1 Comments:
Recent statements attributed to Lereah are at Michael Shedlock’s post dated 4/27/06 at:
http://globaleconomicanalysis.blogspot.com/2006/04/new-gold-standard.html
Shedlock quotes a letter from a Florida real estate agent named Mike Morgan. Morgan’s info is here:
http://www.treasure-coast.us/HomePage
Morgan Florida 941 SE Central Parkway Stuart, FL 34994
Phone: 888-227-5217 Cell: 772-260-5448 Fax: 772-288-1971 E-mail: Mike@MorganFlorida.com
If Lereah is quoted correctly it should be confirmed and reported because it will make headlines. Maybe George can dig around a bit. Here are some excerpts from Morgan’s letter:
Hello everyone,
I just left a meeting where [Lereah] spoke. [He] was not as positive as he has been…. [H]e made an effort to put a positive spin on the markets. However, his wrap up summed it all up. “Some builders will get caught with their pants down, because they built too much.”
He lead off by stating, the media is responsible as they are not looking at the data or putting it in the right place.
…went on to blame the issues on FNMA making it easier to finance a home and, get this, the Internet making it easier for buyers to find homes.
…noted that 40% of homes are second homes. He failed to note that most investors purchased homes and told the builders that these were primary homes.
…continued to paint a rosy picture by stating that real estate was the, and I quote, “new gold standard.”
…On the flip side of the rosy picture he admitted, “Prices got a “little” too high, we got ahead of ourselves. . . . We need to catch our breath.”
…He then noted, “It happened in the stock market. How many people purchased Qualcomm, Lucent, I doubled down on Lucent. We became irrational during the stock market craze.” Well, I ask, how does that balance with his statement about real estate, “There were lotteries to get into deals. I got into one!” He got into one? The Chief Economist of NAR?
A few more quotes, “Go to Miami to see the excess.”
…“40% of all loans in 2006 were interest only. . . Prices went higher because of the artificial energy in the real estate market . . . that’s what took the punch bowl out of the party.”
…After his Miami reference he said, “Naples Florida is even worse. Misery loves company.”
…“We are transitioning to a buyers market. It could be 1 month, 6 months, 12 months.” Very highly unlikely that this is one month or even six months.
…“You have a great future in real estate, but you need to cleanse your real estate markets. We made a mistake. It’s going to hurt. You are going to have a double digit drop. Expect it.” And in his very next breath, “2006 will be the best year ever.”
…“No signs of a bubble bursting.”
…Next breath, “Naples right now is experiencing some problems.”
…“Conventional wisdom turned on its head.”
…I love this one. “The laws of supply and demand have not been revoked.”
…“Is this a bad year. Yes. Your numbers will down. You got ahead of yourselves. The market got ahead of itself.”
…“middle of 2007 when you start to pick up again. I see Florida picking up in 2007. But there are particular markets that will not. It depends on inventory levels.”
Morgan himself notes: I have warned my investor clients for more than a year that this was coming…. Many agents blast me for being so negative and “single handedly bringing down the market.” I take great pride in how I have conducted my business. Unfortunately, I will still take quite a bit of heat, as I recommend to my clients to rent for 6-12 months and then buy . . . unless there is some overpowering reason for them to buy now. That’s certainly not what my fellow Brokers want to hear, but my duty is to my clients. As a licensed professional, I must adhere to our Code of Ethics. I do what is best for my clients, not my fellow Brokers.
Post a Comment
<< Home