Wednesday, May 17, 2006

Critical Eye Required When Looking At Housing Data

This post is a reply to the anonymous person that posted the following comment today:

------------------------------------------
Most of the ppl reading this blog are just praying for a good deal cause they got screwed out of the boom for the last 10 years.

I mean, do people really believe there's going to be fire sales based on housing's track record?

http://www.nahb.org/generic.aspx?sectionID=131&genericContentID=503

Aside from a small blip in 91-93, which quickly recovered in 94, there has been no real prolonged downturns.

If this were a stock, I'd say the performance were pretty damn good.

------------------------------------------

The anonymous poster points to data available on the National Association of Homebuilders website as an indication that housing has traditionally been a "good investment".

Fair enough anonymous, unlike most others here, you actually provided a reference to some publically available data to make your point.

But let's take a good look at that data before we jump to the obvious conclusions. The NAHB data available at that link are annual median and average prices of a new home in the United States. The source of the data is the Census department, I have no reason to not believe those numbers, so we'll just take them as is.

However, the numbers provided are not "real". No, I don't mean that those numbers are somehow being faked, but they have not been adjusted for inflation. Inflation is real, it exists, and it erodes the value of your dollars. A 1980 dollar is a very different thing than a 2006 dollar. Let me show you what I mean.


This chart shows the median new home price from 1980 to 2005. Wow, it certainly does look like new homes are a great investment, the price has consistenly gone up, year after year. However, what happens if we make dollar from 1980 worth the same amount as a dollar from 2005? If we do that, then we can compare apples to apples, so to speak. Using the inflation calculator found here (http://minneapolisfed.org/Research/data/us/calc/) I adjusted the median home price for inflation. This was a simplistic approach, and yes let's just believe the CPI numbers to be true, but it serves the purpose. So lets see what happens to the chart above when we adjust the values.


Ok, so now that we level out the playing field with regards to the value of a dollar. The picture begins to become a bit clearer. The decline in housing after the bubble burst in the late 80's becomes more obvious. It's no longer just a little blip on the way up. It should be obvious to you now why industry sources don't adjust their values for inflation.

There is another aspect we just can't neglect here. What about the change in quality and size of homes from 1980 until today? Homes today are much larger than in 1980. In fact, in 1980 the median home was approximately 25% smaller than the median home was in 2005 (1595 sq/ft versus 2140 sq/ft). Since the size of the home affects it's price, we're again comparing apples and oranges. We certainly can't compare a smaller and less ornate home built in 1980 with the larger and more elaborate home built in 2005. So what do we need to do? Adjust the values so that we can make a comparison. In order to do this, we first need to find out the median size of a home over the same time period. Luckily, the Census department makes that data available online. You can find it here (http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf). In order to adjust I simply created an index that compared each year with 2005. I than multiplied the price of the home each year with the index in order to normalize prices across all years. So lets see what happens when we make both 1980's dollars and homes equal to the same in 2005.



Indeed, a much different picture from the simplistic view we initially took when looking at the data. My adjustment only takes into account the change in square footage, a very simplistic approach. It's arguable that changes in quality of fixtures should also be included. That aside, the data now tells a much different story. Great gains? Hardly, especially once you factor in the cost of upkeep and repairs over 20 years.

Also keep in mind that we're talking about the median price of a home in the United States. This is more of an economic indicator than some kind of insight into the house price movements of local markets. The midwest likely saw less of an impact during the last bubble collapse. Thus, the national median doesn't reflect price changes in smaller markets.

My only advice is to be careful when someone presents you with data, especially those who have a vested interest in your actions as a response to that data. The NAR paint a very rosy picture and love to quote unadjusted median home prices. Those numbers don't tell the real story.

Home prices do fall.

Caveat Emptor!
Grim

42 Comments:

Anonymous UnRealtor said...

Even if, over time, housing proved to be a great investment, it would still be unwise to buy at cycle peak.

5/17/2006 07:39:00 PM  
Anonymous Anonymous said...

Grim - As usual, you deliver the facts with integrity and clarity. Thank you!

5/17/2006 07:45:00 PM  
Blogger grim said...

Here are my calc/numbers:

Year Median Home Price
1980 $64,600
1981 $68,900
1982 $69,300
1983 $75,300
1984 $79,900
1985 $84,300
1986 $92,000
1987 $104,500
1988 $112,500
1989 $120,000
1990 $122,900
1991 $120,000
1992 $121,500
1993 $126,500
1994 $130,000
1995 $133,900
1996 $140,000
1997 $146,000
1998 $152,500
1999 $161,000
2000 $169,000
2001 $175,200
2002 $187,600
2003 $195,000
2004 $221,000
2005 $238,100

5/17/2006 08:04:00 PM  
Blogger grim said...

Year Median (Inflation Adjusted)
1980 $153,111
1981 $148,033
1982 $140,252
1983 $147,652
1984 $150,187
1985 $153,009
1986 $163,938
1987 $179,655
1988 $185,725
1989 $189,000
1990 $183,645
1991 $172,070
1992 $169,130
1993 $170,972
1994 $171,316
1995 $171,592
1996 $174,264
1997 $177,656
1998 $182,719
1999 $188,735
2000 $191,671
2001 $193,314
2002 $203,659
2003 $206,976
2004 $228,488
2005 $238,100

5/17/2006 08:05:00 PM  
Blogger grim said...

Year Median (Real & Size Adjusted)
1980 $192,105
1981 $188,845
1982 $180,885
1983 $187,324
1984 $187,734
1985 $191,262
1986 $200,709
1987 $211,977
1988 $214,365
1989 $214,612
1990 $203,811
1991 $192,172
1992 $186,517
1993 $186,551
1994 $187,327
1995 $189,233
1996 $189,736
1997 $191,354
1998 $194,673
1999 $198,613
2000 $199,105
2001 $196,656
2002 $206,134
2003 $207,266
2004 $228,488
2005 $238,100

5/17/2006 08:05:00 PM  
Blogger grim said...

Year Median Sq/Ft Index
1980 1595 1.254672897
1981 1550 1.275700935
1982 1520 1.289719626
1983 1565 1.268691589
1984 1605 1.25
1985 1605 1.25
1986 1660 1.224299065
1987 1755 1.179906542
1988 1810 1.154205607
1989 1850 1.135514019
1990 1905 1.109813084
1991 1890 1.11682243
1992 1920 1.102803738
1993 1945 1.091121495
1994 1940 1.093457944
1995 1920 1.102803738
1996 1950 1.088785047
1997 1975 1.077102804
1998 2000 1.065420561
1999 2028 1.052336449
2000 2057 1.038785047
2001 2103 1.01728972
2002 2114 1.012149533
2003 2137 1.001401869
2004 2140 1
2005 2140 1

5/17/2006 08:06:00 PM  
Blogger grim said...

Weekly Home Mortgage Rates

30 Year Fixed
May 17 Prev. Wk
percent+points
Boston 6.70 + 0.28 6.61 + 0.26
Chicago 6.82 + 0.08 6.77 + 0.06
Dallas 6.75 + 0.46 6.68 + 0.48
Detroit 6.76 + 0.04 6.73 + 0.01
Houston 6.70 + 0.53 6.66 + 0.56
Los Angeles 6.78 + 0.48 6.74 + 0.44
New York 6.70 + 0.28 6.63 + 0.23
Philadelphia 6.64 + 0.37 6.58 + 0.43
San Francisco 6.80 + 0.25 6.75 + 0.27
DC Metro 6.60 + 0.67 6.55 + 0.76
National Avg 6.73 + 0.34 6.67 + 0.35

5 Year ARM
May 17 Prev. Wk
percent+points
Average 6.33 +0.35 6.35 +0.37

5/17/2006 08:12:00 PM  
Blogger chicagofinance said...

grim:

You are such an Economics PhD wannabe!

;-)

5/17/2006 08:22:00 PM  
Blogger Grim Ghost said...

Grim --- you don't need to do all those calculations. The OFHEO http://www.ofheo.gov/

has a house price index. Its based on a great deal of data, and looks at changes in the value of the same house, so its far more reasonable in terms of measuring average appreciation then going by pure NAR median sales numbers. As I recollect, it also adjusts for house improvements, addition etc (although not for inflation, but thats easy to do). It does look only at conforming FNM mortgage data, so it misses the high end of the market.

And yes, the OFHEO data does show drops at different times.

5/17/2006 08:23:00 PM  
Anonymous Anonymous said...

btw, the original chart was only for new homes...i would love seeing existing home sells prices...

JM

5/17/2006 08:41:00 PM  
Blogger grim said...

grim ghost,

Anonymous cited a specific source. Wanted to reply using the same data.

Agree, if you adjust the OFHEO index for inflation you get a very clear picture of home prices over time.

grim

5/17/2006 08:46:00 PM  
Anonymous gary said...

Swish!!! Grim, you are awesome!

5/17/2006 08:50:00 PM  
Anonymous iLoveData&Graphs said...

Nicely done...

5/17/2006 09:04:00 PM  
Blogger Metroplexual said...

grim,

I know someone who was an economist with NAHB. No econ degree. Just a history degree and an MCRP (planning). Take anythib=ng from them with a grain of salt.

5/17/2006 09:31:00 PM  
Blogger Roadtripboy said...

Grim,

Fabulous post! That anon poster annoyed me with his overly co$ky attitude. It's also good PR to answer these "attacks" head on.

5/17/2006 10:07:00 PM  
Blogger REINVESTOR101 said...

Looking at the inflation adjusted chart, it seems that growth over the 25 year period averaged roughly 2% a year, in real terms.

Given that tepid increase, this chart would appear to argue against the existence of a bubble in the real estate markets on the basis on the fact that real returns have been rather muted.

5/17/2006 11:59:00 PM  
Blogger pesche22 said...

if the dollar continues going down like it is the value will
50% less in 5 years.

that a fact. the buck continues
not to be the world currency it once was.

5/18/2006 05:01:00 AM  
Blogger grim said...

REInvestor,

I believe you are misinterpreting the data.

Two factors come into play here.

1) These are the sale prices of new homes, not resales. That is an important distinction. This data says nothing about appreciation, only the change in price of a new home. Your statement assumes that you could sell a home purchased new in 1980 for the same price as a home purchased today. That, quite obviously, isn't the case.

2) This measure is a national aggregate. It is a very long stretch to try to say anything about Northern New Jersey using this data.

REInvestor.. The data you want to see would be the OFHEO index, adjusted for inflation of course. Because OFHEO measures resales, we don't need to adjust for anything other than inflation.

You can find that graph here:

Home Prices Do Fall

A much clearer picture of the current state of our local market.

grim

5/18/2006 05:14:00 AM  
Anonymous Anonymous said...

Here's another report with lots of numbers and comments on buying vs. renting. The punchline is that if you are planning to stay in the house for five years, you are probably OK.

http://www.pmigroup.com/lenders/media_lenders/pmi_eret06v2s.pdf

5/18/2006 06:06:00 AM  
Blogger grim said...

That is one of my favorite PMI pieces. Mark Milner throws in a little anecdote about his own home buying experience on the second page.

"I have my own story to tell in this regard. I’m one of the unlucky ones: in 1989, I bought a home in Los Angeles—right before the bottom fell out of the market. When I got a job in another city and sold seven years later, I lost my down payment and everything I’d put in since, and I even wrote a
check to the bank for a little bit extra."

Interesting that Mark would offer up his own anecdote of what seems to be a rather large loss after seven years in the market. He even talks about bringing a check to closing, ouch.

The moral of the story is that, traditionally, the longer you hold, the better chance that inflation will make you feel like you didn't lose money. Mark lost money because Mark chose to buy at the top of the bubble, and 7 years time didn't save him, in fact, Mark would have likely needed to wait 5 more years to break even on his investment, a total of 12 years.

grim

5/18/2006 06:16:00 AM  
Blogger grim said...

Some other things to keep in mind when looking at the PMI piece:

1) The data is aggregate, consisting of the top 50 MSAs (Metropolitan Statistical Areas).

Why is this important? Because when you purchase a house, you are doing so in a local market, you are not buying shares in an index with holdings in those 50 MSAs. Aggregating the top 50 MSA's over this time period is going to mute the changes of individual markets over that time.

2)PMI and other groups like to base their forecasts on a number of assumptions, such as:

a) 20% down payment in all cases

b) Assumptions that all buyers are using and can afford a 30-year fixed mortgage.

c) If using Adjustable rate mortgages, assumptions that interest rates will not rise dramatically.

3) Like many others, they do not adjust for the impact of inflation.

grim

5/18/2006 06:31:00 AM  
Anonymous Anonymous said...

Great Job grimster. The Facts speak for themselves....not some fluffy spin.
The house price floor is about to cooolllapse!

BOYCOTT HOUSES!

Boooooyaaaaaaa

Bob

5/18/2006 07:09:00 AM  
Blogger chicagofinance said...

REINVESTOR101 said...
Looking at the inflation adjusted chart, it seems that growth over the 25 year period averaged roughly 2% a year, in real terms.

Given that tepid increase, this chart would appear to argue against the existence of a bubble in the real estate markets on the basis on the fact that real returns have been rather muted.

12:59 AM


RE: I disagree. What is generally a flat line, suddenly experiences are marked updraft. Think how much of the nominal return is being stripped out when you deflate the numbers, then realize how much movement is required to cause the data to move that far upward.

chicago

5/18/2006 07:34:00 AM  
Anonymous Anonymous said...

GSML Inventory Does not include FSBO

Inventory Going up everyday. It is relentless.

5/18/06 29,260

5/12/06 28,820

5/8/06 28,471

5/3/06 28,110

4/12/06 26,582

3/06/06 24,111

HOUSING BUST!

Want to be a bagholding mtg slave, then fgo ahead buy now at near peak prices.

BOOOOYAAAAAAAA

Bob

5/18/2006 07:35:00 AM  
Anonymous Anonymous said...

Buy at near peak prices and look what happens:

"Nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005, according to First American Real Estate Solutions, an arm of title-insurance company First American Corp. The study of 26 million homes in 36 states and the District of Columbia found that one in 20 home borrowers was upside-down by 10% or more.

The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more."

Housing Bust!

Boooooooyaaaaaaaa

Bob

5/18/2006 07:37:00 AM  
Anonymous Anonymous said...

Tremendous post.

This is about the clearest explanation of the housing market that I have ever seen, and I've been looking pretty hard for a couple of years now.

Thaks for laying it out so plainly.

5/18/2006 08:53:00 AM  
Blogger Rob Ryley said...

Grim,

I saw the comment this post refers to. I was thinking the exact same thing. Good work.

Shiller, Talbot, etc. use the same procedure in their books to put the price trends in real estate into perspective.

5/18/2006 09:13:00 AM  
Anonymous Anonymous said...

Grim, this is a great post...I've also heard that the average return on real estate is about 1% per year. Seems to make sense looking at this chart.

Would love to see resale numbers? Anyone?

JM

5/18/2006 09:28:00 AM  
Anonymous Anonymous said...

Median Home prices

How is it calculated. Is it equal weighted in each region or is it population weighted per region or income per capita weighting per region?

5/18/2006 09:46:00 AM  
Anonymous Anonymous said...

The problem with looking at this data is that it is for the entire country at large, and you really can't do that.

Let's face it. There's "zoned" America and "unzoned" America and we all know that.
There are parts of the country where values hardly budge (recent few years aside) and other parts, because of zoning regulations and proximity to major areas of business, which skyrocket.

I don't have time to go through the data and do it, but if you were to chart the coastal areas and compared them to central and southern portions of our country (adjusting for inflation and housing size), I'd bet the contrast between the two would be striking.

And given that most of us on here live in NJ, thats all that matters to us.

5/18/2006 11:16:00 AM  
Anonymous Anonymous said...

Yes the coastal markets of the US Northeast, Calif, Fl DC have had the most explosive home prices increases and busts over the last few real estate cycles. To compare this area to areas of the country where prices have barely budged over time is not an accurate indication of our markets or of median home prices.

5/18/2006 11:26:00 AM  
Blogger grim said...

Working on a similar analysis for Norther Jersey. The basis will be the OFHEO Index data (By MSA) corrected for inflation using the more appropriate 'CPI Less Shelter' data for each of those MSAs.

It's going to take me a little bit of time to get that together.

5/18/2006 11:30:00 AM  
Blogger Shailesh Gala said...

Great job Grim. I think you proved the point accurately, that RE does come down, Boom & Bust are cycles in Market.

The major difference between House & other investment is that we live in them. Other investments are easy to own & dump compared to house. Also Housing is necessity.

At the same time, I feel, buying a small house for one's personal use, within in limited debt risk is still good thing to do. Overextending to buy bigger house is risky as well as buying investment property.

The trouble is, at present, to afford a house, most have to make significant compromise in terms of house size or towns or distance. This makes it difficult to make decision.

5/18/2006 12:32:00 PM  
Anonymous Anonymous said...

Gala,
Wow!!! Thanks for spelling it out for us! We had no idea..

5/18/2006 01:01:00 PM  
Blogger Shailesh Gala said...

Anon 2:01:

Well Thanks. I am always glad to help Newbies, who starts by posting Anon.

5/18/2006 01:11:00 PM  
Anonymous Anonymous said...

lol!
so let's see...
- we can live in a house that's why it's a different kind of investment
- buying more house than we can afford is risky
- we have to compromise if we buy in this market

did I get it right? did everybody get that?

5/18/2006 01:14:00 PM  
Anonymous Anonymous said...

anon 2:14

I think he was also trying to tell us that due to present conditions it's "hard to make a decision"

:)

5/18/2006 01:17:00 PM  
Anonymous Anonymous said...

That was a great way to break down the data grim. Thanks. I never saw an analysis like that one.

5/21/2006 07:20:00 AM  
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