From the Chat: Questions about tiered price indices, seasonality and supply & demand.
The July 26th chat session ended with some questions that we didn’t have time to answer or where we needed to check the data before we could answer them completely. To follow are a few more answers to some of the questions.
Question: “How much do you think talk of potential 20 percent down payments and new, lower loan limits will impede any recovery, particularly in the low and middle price tiers?” Given the current market sentiment, these can certainly have an effect on the recovery. With the dramatic decline in home prices over the past three years, it would seem that housing should be considered very affordable. However, we do not see an abundance of buyers out there. The problem it that getting a mortgage is not as easy as it once was and too many people are still suffering from the credit problems of the recent past. I posted an analysis of some of the markets and the behavior of their tiers last week. See here. In many of the cities, the low-tiered markets suffered badly compared to the high-tiered markets. In some, they are still suffering. Until the current crisis stabilizes, we cannot expect market sentiment to change.
Two Questions Relating to Seasonality: 1) “Given the increasing seasonality, do you think this is due primarily month-to-month changes in demand (seasonality of buyers), given the overwhelming supply?” 2) “Your indexes and that of the FHFA, among others, seem to be suggesting that there was an abatement of price declines this spring (on a seasonally adjusted basis). Do you see this as a significant challenge to the widely held view that prices, in terms of national averages, have farther to decline?” Given the seasonality of the housing market, the increase in prices we saw with April and May’s data was not a surprise. The issue is whether those increases are enough to move the overall momentum in a positive direction. As of right now, they have not, and the excessive supply will continue to be a challenge in many regions. The 10- and 20-City Composites and 11 MSAs saw their annual rates worsen in May compared to April. While slightly dated, this issue was discussed a bit in a July 12th article (see here), which we can update on a regular basis. We do expect people to focus on both the monthly and annual changes over the next few months, as they try to separate anticipated seasonal movements from the true momentum of the housing market.
Question: “What are the supply and demand components driving the current house price data? In other words, is demand still continuing to creep up, albeit slowly, or has demand flattened or turned down? On the other hand, do distressed sellers such as banks, continue to dump housing inventory onto the market or have other sources of housing ‘supply’ also continued to increase? What are the outlooks for the supply and demand components that inevitably drive market prices? I am particularly interested in the Chicago market” There are many variable effecting both sides of the market. While home prices and interest rates are relatively low (seemingly a buyers’ market), credit quality, the job situation and consumer confidence are having counter effects on demand. On the supply side, there is excess inventory and above normal foreclosure rates across many markets. Until that is worked off a bit, many people who can afford to stay in their houses now may do so, and not try to sell until they believe they can get a higher price. Since the housing market is still in turmoil, the true measures of supply and demand are hard to gauge. As our July 29th discussion points out (see here), whether due to changes in supply, demand, or both, the past few years have been highlighted by a slowdown in sales.
Click here to view the July 26th Live Chat post with more Q&As.