Case Shiller Housing Figures are Misleading: Why the Real Estate Market is Still in Trouble


U.S. home prices bounced higher for a second month in a row, a strong advance from a historical perspective. In determining whether the statistic will be helpful to the president in the election, it is imperative to look at a number of other facts that impact the housing market as well.

The S&P/Case-Shiller 20-city composite index registered a 2.3% advance in home prices in June. The year-on-year move is now positive for the first time in two years at 0.5%.

Certainly, this is good news for the housing market. Month-to-month and year-to-year gains are a true indication of improved conditions. But, housing prices are still roughly 31% lower than they were in 2006, so the euphoria is not really warranted. Nevertheless, the president’s campaign will likely showcase this statistic in its efforts to prove that the economy is moving in the right direction.

Sales activity has been climbing rapidly; the three-month average of new home sales is up 21% compared to last year. This phenomenon is a function of near record low mortgage rates. But, the comparison is against a very low number a year ago, so it is not a compelling statistic.

Two hard-hit swing states, Nevada and Florida have the distinction of being one and two on the “Housing Misery Index,” a ranking by the real estate website “Trulia.” Basically, high foreclosures are colliding with steep price drops that are devastating homeowners. The voters in these states will want to hear from the president. Obama is scheduled to visit Nevada again this week, his 12th visit since taking office.

The Hill indicates that Obama has the power to stem “the tide of foreclosures right now.” There is a “need for principal reduction -- the writing down of mortgages to actual value.” To this point, reforms have focused “on refinancing or forbearance and made optional for banks,  . .  .”  They “have failed to make significant impact.” The blurb states that principal reduction would prevent foreclosures; it would be a stimulus for the economy; it would not require taxpayer dollars; and it would create up to one million jobs. The only problem with this plan is that it might bankrupt scores of banks. The proposal would upset the fragile state of banks in the country. Bank failures could cost the taxpayers billions.

Fannie Mae and Freddie Mac control nearly 40 percent of underwater mortgages. These organizations are not able to reduce principal as a means of preventing foreclosures. Fannie and Freddie are culpable for many of the housing problems the nation is facing today (they reduced credit standards to encourage housing purchases). They have cost taxpayer and private investors hundreds of billions of dollars. Principal reductions would necessitate further losses and embarrassment for the companies and for Congress. The proposal is a non-starter and not likely to ever happen.

The number of homeowners with mortgages nationwide with negative equity stands at 30.9%. This means that mortgages outstanding are greater than the value of the homes they finance. Young people are being affected the most as nearly half of all borrowers nationally younger than 40 are underwater.

As an aside, “tight inventory” (a shortage of homes for sale) in many markets, which traditionally raises prices, is occurring because underwater borrowers refuse to sell and are trapped. Tight inventory claims need to be examined before one can assume that higher prices are a sign of recovery.

And finally, the issue of  “shadow inventory” is plaguing the housing market. Lowering the total inventory of houses for sale is how prices stabilize and sales volume moves higher. Shadow inventory adds to the backlog of “ordinary inventory,” houses listed with real estate companies. Shadow inventory includes bank-owned real estate, distressed houses not yet for sale, short sales, delinquencies and foreclosures. These houses will eventually become part of the total supply and create downward pressure on prices. The unofficial count of shadow inventory runs as high as 10 million.

There is a huge overhang of underwater homeowners whose houses are worth as much as 25% less than what is owed. Two-thirds of all U.S. houses have mortgages; an estimated 21% to 29% are underwater.

Americans are hoping for a housing rebound, and so excessive euphoria results every time a positive statistic is published. Our economy will be stagnated so long as housing prices, sales, inventory, foreclosures, shadow inventory, and delinquencies complicate the market. Wholesale proposals to transfer problems to banks will never happen as they would cause more problems than those solved.

Voters are waiting to hear what solutions the presidential candidates will propose. Hopefully, these will be explored during the debates.