Thursday, June 05, 2008

Read the fine print 

I'm at the end of a three-week intensive course that I teach every other year (in sports economics) and so this week has been light blogging. It's mostly because I'm busy reading sports business and not much else. And I am tired from four-hour-a-day lecturing for three weeks. But I couldn't miss the morning headline in the St. Cloud paper: Home prices stable here. I thought I heard "Happy Days are Here Again" while I read this.

Where the two-county St. Cloud area saw declines in housing prices in the last half of 2007, it saw an increase in the first quarter of 2008, according to the data. Prices increased 1.19 percent in first quarter 2008. Before that, values changed negative 2.54 percent in the fourth quarter and negative 0.91 percent in the third quarter.

This report shows St. Cloud will likely see stable home values for at least the next two quarters, said Louis Johnston, associate professor of economics at the College of St. Benedict and St. John�s University. Values won�t grow as fast as they did during the housing bubble, he said, but they likely won�t collapse.

That�s good news for people looking to sell their homes, as well as for cities, counties and school districts� planning budgets, Johnston said. Taxes that fund government are based on property values.

I'm looking at that and thinking, "hmmm..., that doesn't fit what I think is going on." So I first get the OFHEO report discussed. Yup, there it is. St. Cloud for 1-year price change is ranked 212 of 292 metropolitan areas reported. I don't know that I would be too happy about being in the 212th best market.

Second, the OFHEO data looks both at sales and at refinancings, and only at single-family homes. In the FAQ of the report:
The House Price Index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included. Conforming refers to a mortgage that both meets the underwriting guidelines of Fannie Mae or Freddie Mac and that does not exceed the conforming loan limit, a figure linked to an index published by the Federal Housing Finance Board. The conforming loan limit for mortgages purchased in 2007 was $417,000. Legislation enacted in February 2008 has raised the limit on a temporary basis to as much as $729,750 in high cost areas in the continental United States. Conventional means that the mortgages are neither insured nor guaranteed by the FHA, VA, or other federal government entities. Mortgages on properties financed by government-insured loans, such as FHA or VA mortgages, are excluded from the HPI, as are properties with mortgages whose principal amount exceeds the conforming loan limit. Mortgage transactions on condominiums, cooperatives, multi-unit properties, and planned unit developments are also excluded.
Well, that seems to exclude rather a lot. When you compare this to the sales report of the St. Cloud Area Association of Realtors, which shows prices falling 10% in the first quarter, you get quite a different story. Now some of that might be that the houses sold in the first quarter were of lower quality; the OFHEO measure looks at repeated sales (as does the Case-Shiller index), to hold quality relatively constant (though the improvements you put into the house don't get reflected, as I understand these measures.)

But it's important to recognize the limited coverage of those data the Times' story uses. Looking only at Fannie and Freddie insured loans takes a more stable, less bubbly portion of the real estate market. Including refinances in the national index revises the data from a decline in the first quarter of 1.7% to a decline of only 0.2%. (I don't see a number for purchase-only for St. Cloud.) 82.3% of the data used nationally came from refinances. I think you'd have to account for that before writing a headline quite like what the Times uses.

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