House Price Bubbles And Buyer Overconfidence

An Extrapolative Model of House Price Dynamics:

A modest approximation by homebuyers leads house prices to display three features that are present in the data but usually missing from perfectly rational models: momentum at one-year horizons, mean reversion at five-year horizons, and excess longer-term volatility relative to fundamentals. Valuing a house involves forecasting the current and future demand to live in the surrounding area. Buyers forecast using past transaction prices. Approximating buyers do not adjust for the expectations of past buyers, and instead assume that past prices reflect only contemporaneous demand, as with a capitalization rate formula. Consistent with survey evidence, this approximation leads buyers to expect increases in the market value of their homes after recent house price increases, to fail to anticipate the price busts that follow booms, and to be overconfident in their assessments of the housing market.

U.S. Existing Home Sales Increase To Annual Rate Of 4.88 Million In February

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 1.2% in February to a seasonally adjusted annual rate of 4.88 million. This annual rate is 4.7% higher than the 4.66 million-unit level in February 2014.

Lawrence Yun, NAR chief economist, says although February sales showed modest improvement, there’s been some stagnation in the market in recent months. “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

Adds Yun, “Severe below-freezing winter weather likely had an impact on sales as more moderate activity was observed in the Northeast and Midwest compared to other regions of the country.”

“With all indications pointing to a rate increase from the Federal Reserve this year – perhaps as early as this summer – affordability concerns could heighten as home prices and rents both continue to exceed wages,” adds Yun.

Existing Home Sales Change

The existing home sales rate decreased in 2 out of 4 U.S. regions in February:

  • Northeast: 0.58 million from 0.62 million month prior.
  • Midwest: 1.08 million from 1.08 million month prior.
  • South: 2.11 million from 2.07 million month prior.
  • West: 1.11 million from 1.05 million month prior.

Existing Home Sales

Total housing inventory at the end of February increased 1.6% to 1.89 million existing homes available for sale. That represents a 4.6 month supply at the current sales pace. Unsold inventory is down 0.5% from a year ago, when there were 1.90 million existing homes available for sale.

Existing Home Sales Supply

The median time on market for all homes was 62 days in February. That is down from 69 days in January. Short sales were on the market for a median of 120 days, while foreclosures typically sold in 58 days, and non-distressed homes took 61 days. 34% of homes sold in February were on the market for less than a month.

The national median existing home price for all housing types was $202,600, up 7.5% from a year ago.

Exiszting Home Sales Price

CFNAI Contracts To -0.11 In February

The Chicago Fed’s National Activity Index (CFNAI) was a reading of -0.11 in February, down from January’s revised reading of -0.10. The negative figure indicates that the index is below its historical trend. The index’s 3-month moving average is at -0.08.

48 of the 85 individual indicators made positive contributions to the CFNAI in February, while 37 made negative contributions. 46 indicators improved from January to February, while 39 indicators deteriorated. Of the indicators that improved, 10 made negative contributions.

The Production and Income index component registered -0.07 from -0.20 last month. Employment and Hours was +0.11 from +0.16, Personal Consumption and Housing was -0.17 from -0.07, and Sales, Orders, and Inventories was +0.02 from +0.01.

CFNAI Components

CFNAI

Production and Income

Employment and Hours

Consumption and Housing

Sales and Orders

The CFNAI is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. Each of these data series measures some aspect of overall macroeconomic activity. 

It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

Stock Market Anticipations And Household Expenditures

Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession:

Data from the 2009 Internet Survey of the Health and Retirement Study show that many U.S. households experienced large capital losses in housing and financial wealth, and that 5% of respondents lost their job during the Great Recession. As a consequence of these shocks, many households reduced substantially their expenditures. For every 10% loss in housing and financial wealth, the estimated drop in household expenditure is about 0.56% and 0.9%, respectively. In addition, those who became unemployed reduced spending by 10%. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year’s time, and those who do not. In line with the predictions of standard models of intertemporal choice, we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks.

U.S. House Prices In December 2014

S&P Case-Shiller Home Prices increased in December, with the 20-city composite index rising by 0.1% (not seasonally adjusted). Year over year, the 20-City Composite is up 4.5%.

Case-Shiller Change

The national house price level is now roughly equal to where it stood in November 2004.

Case-Shiller Index

Of the 20 cities tracked in the index, Los Angeles has had the greatest increase in home prices since 2000, while Detroit has been the only city where prices have declined over the past 15 years.

Case-Shiller Cities

From a year ago, house prices have increased the most in San Francisco, where they rose 9.3%. Chicago has had the slowest rate of annual increase, rising only 1.3%.

Case-Shiller Cities Change

Dallas and Denver are the only cities whose prices have increased beyond their pre-recession peak. Las Vegas remains the furthest below its peak.

Case-Shiller Table

The U.S.Federal Housing Finance Agency saw its national house prices increase 0.8% in December (not seasonally adjusted), and increasing 5.4% from a year ago.

The FHFA HPI is calculated using home sales price information from mortgages either sold to or guaranteed by Fannie Mae and Freddie Mac.

FHFA Change

The U.S. index is 3.7% below its March 2007 peak and is roughly the same as its November 2005 index level.

FHFA Index

Of the 9 different geographic census divisions that FHFA tracks, house prices have increased the most year over year in the Pacific and increased the least in the Middle Atlantic region.

FHFA Regions

U.S. Existing Home Sales Decline To Annual Rate Of 4.82 Million In January

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 4.9% in January to a seasonally adjusted annual rate of 4.82 million. This annual rate is 3.2% higher than the 4.67 million-unit level in January 2014.

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

“Although sales cooled in January, home prices continued solid year-over-year growth,” adds Yun. “The labor market and economy are markedly improved compared to a year ago, which supports stronger buyer demand. The big test for housing will be the impact on affordability once rates rise.”

Change in Existing Home Sales Rate

The existing home sales rate decreased in all 4 U.S. regions in January:

  • Northeast: 0.63 million from 0.67 million month prior.
  • Midwest: 1.08 million from 1.11 million month prior.
  • South: 2.07 million from 2.17 million month prior.
  • West: 1.04 million from 1.12 million month prior.

Existing Home Sales

Total housing inventory at the end of January increased 0.5% to 1.87 million existing homes available for sale. That represents a 4.7 month supply at the current sales pace. Unsold inventory is up 0.5% from a year ago, when there were 1.88 million existing homes available for sale.

Existing Home Inventory

The median time on market for all homes was 69 days in January. That is up from 66 days in December. Short sales were on the market for a median of 128 days, while foreclosures typically sold in 63 days, and non-distressed homes took 68 days. 30% of homes sold in January were on the market for less than a month.

The national median existing home price for all housing types was $199,600, up 6.3% from a year ago.

Existing Homes Median Sales Price