Making sense of home prices

Every so often, we read headlines about housing prices (seems like every other headline is about housing prices these days), and they all seem to contradict each other. Why is it that while NAR numbers say we are flat-to-mildly-decreasing, the Case-Schiller index states that we are decreasing? Which numbers do we trust, and why are they so different?

To start, there are 3 major indeces:

1. OFHEO (Office of Federal Housing Enterprise Oversight – they regulate Fannie Mae and Freddie Mac)
2. S&P / Case-Shiller index
3. National Association of Realtors (NAR)

1) OFHEO looks at existing home sales and excludes new home purchases. In addition, it only looks at conforming loans, ignoring transactions that are not guaranteed by Fannie and Freddie. Homes with non-conforming mortgages are seeing larger price declines than the homes that OFHEO tracks. So this means that the numbers that OFHEO reports are not as volatile as the rest of the indeces. To make matters even more complicated, OFHEO also considers appraisals that are generated when people refinance their homes, which is almost always different from the purchase price, and is a truer indication of market value.

2) Similar to OFHEO, Case-Shiller looks at existing home sales and excludes new home purchases. Although there are actually three Case-Shiller indeces (monthly 10-city survey,  monthly 20-city survey, and a quarterly report that looks at all nine U.S. Census regions), the one that makes it to headlines most often is the monthly 20-city survey. In addition to already being more volatile than OFHEO, this survey can be even more misleading as a proxy for the national situation, as it looks at only 20 metropolitan statistical areas.  It just so happens that these areas include some of hardest-hit areas as far as price declines, such as Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Diego and Washington, D.C. Additionally, Case-Shiller can miss trends in micro-markets, as it doesn’t consider sales of condos and co-ops. So, next time that you are tempted to get worked up over Case-Schiller numbers, don’t. Especially if it’s the monthly survey.

3) NAR’s methodology is much more straightforward.  It looks at sales of existing homes listed by MLSs, and reports median home prices.  As we know, there can be a disconnect between a sales price and a home value. In addition, NAR considers median prices only, reducing the impact of price volatility in upper price ranges.

Case in point: Freddie Mac home-price index indicateed that housing in New York state fell just over 4 percent in value in the past year. Meanwhile, the Case-Shiller index tells a different story, indicating that New York’s home prices are down roughly 15 to 16 percent from their high.

Source: To make sense of the home price indeces, I used a very well written analysis written by Matt Carter for Inman News

New Plan for Freddie / Fannie

found this fantastic video by reading this post in Noah Rosenblatt’s Urban Diggs blog (great blog about NYC real estate that I read quite a bit). Bill Ackman is proposing a new plan to solve the Freddy / Fannie problem and bring liquidity back to the market. This solution is not via a government bailout, but rather proposes a balance sheet restructuring (basically converting their debt to equity, in order to affect the crazy D/E ratio – currently at 129:1 – Yikes!!!).  I am not going to rehash Noah’s post and the video – they both do a great job explaining it. Check it out!

Video: http://www.cnbc.com/id/15840232?video=793726867

Mortgage Mess and Real Estate Investing

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales?  (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property).  This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed.  If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow?  Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control.  Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry.  But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.