Stephen Heise

California and Nevada home prices are now firmly in a bottoming out stage that is likely to last until the end of 2009. Apart from Michigan, home prices in the rest of the U.S. are holding out remarkably well. Energy rich states Texas, Oklahoma, and Wyoming are fairing best.

This animation was generated based on data released today by the FHFA (formerly OFHEO). Methodology is that of my original home price heatmap. For the data hounds, you can download the compiled numerical results for Q1 2009.

Colors on the heat maps are keyed as follows: red is for homes that are selling above their historical price trend and blue highlights those states with sale prices below their long-term inflation adjusted trend based on same-home sales data that spans over 30 years, from 1975 through March 2009. Typically regions experience approximately 20 year cycles with values ranging from 85% to 115% of baseline with each city area following the march of a different drummer. However in this most recent ramp up, all major U.S. cities (and anecdotally globally as well) synchronized to be on the same boom-bust cycle.

For the data hungry, I’ve compiled these detailed city graphs showing heat index trends since 1975. In addition to the 48 contiguous U.S. states shown in the animation, these charts include Alaska, Hawaii, and DC.

Along the left hand side of each graph you will find the historical growth rate for that city expressed as the consumer price index (CPI) plus the additional growth rate percentage as calculated by regression analysis. The values displayed are the published home values divided by the idealized historical growth trend for that city.

For a complete data immersion experience tile the graphs. Or if you have a 2000 pixel or larger display, see the full size tiled version.

[Note: Y-axis labels (growth rate) corrected on April 5th 2009.]

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming

Based on today’s calculated home price heat index data it is possible to use a linear approximation to guesstimate when home prices will bottom out. Here are the results for California and Florida:

To calculate these figures, a heat index range of 0.75 to 0.85 is used as a proxy for the bottom of the local market.

Reviewing the heat index calculations used to produce today’s animated real estate heat maps I noticed that some areas have fallen below the 0.85 index value that typically represents the bottom of a market cycle. Because these areas have overshot the bottom, I am calling them devastated cities:

It’s interesting to compare Q3 and Q4 2008 home prices side by side. There exists an apparent resilience in many low-cost, mostly rural, locales. Maybe it should not be surprising that areas with home prices above $200,000 are most affected by the credit crunch that defines this terrible recession, with states such as California, Florida, and Nevada continuing their declines.

With some Morgan Stanley analysts predicting low inflation for the next 2 years, the road to rapid housing asset price normalization would seem to now lay solely with outright price declines.

As inflation remains tame and credit tight, even modest nominal dollar home appreciation in urban areas appears unlikely for the next one to three years. Complicating the picture is that real-dollar home values are cycling downward and once-booming parts of the U.S. have another 20% to 30% further to drop before turning upward.

Given the pervasiveness of the current credit crunch, it is not clear to me that any other path is at present possible (or desired) than to get the worst of the fall behind us so that we may begin anew to focus on a path of rebuilding, growth, and opportunity.

The pretty animations above are compiled from data released today by the OFHEO. Methodology is that of my original home price heatmap. For the data nerds out there, you can download the compiled numerical results for Q3 2008 and Q4 2008.

Colors on the heat maps are keyed as follows: red is for homes that are selling above their historical price trend and blue highlights those states with sale prices below their long-term inflation adjusted trend based on same-home sales data that spans over 30 years, from 1975 through June 2008. Typically regions experience approximately 20 year cycles with values ranging from 85% to 115% of baseline with each city area following the march of a different drummer. However in this most recent ramp up, all major U.S. cities (and anecdotally globally as well) synchronized to be on the same boom-bust cycle.

$700B is a lot of money. The Paulson Plan is ok, but we can do much, much better and solve this embarrassing mess for less.

Instead of hastily approving Paulson’s plan, the U.S. Government should offer a single simple guarantee that would provide direct relief to both home owners and mortgage holders. Distressed homeowners would be allowed to make partial payments and mortgages would continue to be paid promptly and in full.

Under my proposal, mortgage holders may choose to apply to the U.S. government on behalf of all of their eligible delinquent and defaulting debtors, thereby keeping those homes that make a partial payment out of foreclosure and maintaining bank liquidity.

The government’s maximum monthly liability per home should be reasonably limited, such as to be no more than one half of one percent of the lower of either the original mortgage principal or the prevailing conforming loan limit.

And there would be certain easy to follow rules and conditions:

• The guarantee would cover only owner-occupied homes, not investment and business properties.
• The mortgages must be held by U.S. accredited banks and other gov’t regulated entities on an approved list, to protect the U.S. taxpayer.
• The U.S. government would impose a special Federal Homeowner Bailout Tax and apply a Tax Lien against the property and pay that amount promptly to the lender.
• The federal tax lien, and ultimately taxpayers, would accumulate 7% annual interest on any amounts paid on behalf of a delinquent or defaulting mortgage.
• Since it’s a tax lien, when the home gets sold one day down the road, the government will be first in line to be paid.

This provides instant liquidity to mortgage holders.

This provides instant relief to home owners.

Comments?

Right on track, adjusted same home sale prices are settling down. I expect a good deal more white and light blue in the final frame come the Q3 2008 data set that will be released by the Office of Federal Housing Enterprise Oversight on November 25th.

Beyond 2008, the map will swell with a sea of blue ink. Long term averages require a balance between years of red and years of blue. Because the sharp upward shock in real estate prices was not an isolated regional event, I would expect the transient spike to rapidly dampen itself in a similarly synchronized fashion.

It is an open question whether regions that soared 40% above trend will merely drop to values 15% to 20% below trend as they have done in past corrections, or whether they will suffer an equal and opposite geometric penalty and sell for 28% below their expected long-term value. (In this context, expected long-term value takes into account both inflation and regional growth trends.) The outcome largely depends on how public policy will impact employment and the mortgage credit market over the course of the next six months.

The pretty animation above is compiled from data released today by the OFHEO. Methodology is the same as my original home price heatmap. For the data nerds out there, you can download the compiled numerical results.

Colors on the above map are keyed as follows: red is for homes that are selling above their historical price trend and blue highlights states where sale prices are below their long-term inflation adjusted trend based on same-home sales data that spans over 30 years, from 1975 through June 2008.

California and Nevada home prices are on track to return to normal levels by September 2008. While Florida made a good showing– lopping 5% off average home prices in 3 months– prices there are not likely to reach sanity until Christmas. These states, along with Massachusetts (expected to have relative bargains by July) are poised to lead the nation’s recovery by quickly returning to fair market prices and business as usual.

On the other hand, it would appear that large economies such as New York are slow to take the hint. At the current rate of price declines, NY will not reach historic parity until spring of 2011. This slow, painful decline is likely to criple the regional real estate market in areas that surround the Big Apple.

Market corrections tend to fall on momentum below the long term price trends. Like all averages, there must needs be some data points on each side of the line. Looking at the long-term inflation-adjusted trends, falling housing markets tend to overcorrect by about 15-20% before returning to an upward price trend. In the case of California and Nevada, they are on course for a full recovery to market resilience by June 2009. By that time prices will have fallen a jaw-dropping 40% in real-dollar terms.

Keeping always a careful eye on Michigan– a state that has been badly affected by the current downturn– home prices there continue a moderate decline. Fortunately, the data suggests a brilliant ray of hope for the state. After having reached an all-time low in their inflation-adjusted home price trend index, there is tremendous upside potential in this Great Lakes state. With an abundance of talented workers, Michigan is ripe to rekindle a manufacturing boom in the U.S., led by businesses that find ways to profit by reeling in off-shore production.

Stay tuned: Since my last post, the OFHEO has begun to release some stats on a monthly basis. I plan to analyze and post interesting tidbits from those data releases. In any event, be sure to return on August 26th 2008 to see the cliffhanger animation of the 2008 Q2 home price data.

Data comes from today’s OFHEO data release. Methods are the same as my original home price heatmap. The dataset spreadsheet for this release is made available here.

BTW, colors on the map have the following meaning: red indicates that homes are selling above the historical price trend and blue indicates that sale prices are below long-term trend for municipalities in that state based on same-home sales data from 1975 through March 2008.

Blogger’s Note: In response to reader demand, I have decided to make this animation a regular feature. The next installment will coincide with the May 22 data release.

Homes in The West from Washington state to California to Texas continue to sell at prices well above the long-term inflation-adjusted trend. There is the smallest of hints that New Hampshire, New York, and Pennsylvania are beginning to cool. Ohio and Indiana appear to be holding ground as their neighbor Michigan continues to have woes.

To show the trends I’ve produced an inflation adjusted heat map reflecting today’s OFHEO data release. The methodologies are the same as the original heatmap.

Red means that homes in the state are selling for prices above the historical price trend and blue indicates that homes are selling for prices below the area’s long-term trend based on same-home sales data. The movie starts in 1975 and runs through December 2007.

For more on how I did it, please refer to my detailed original post. The tab-delimited data set I used to construct this animation is here.

As a way of whetting your appetite — with just fifteen days to go until the next OFHEO House Price Index data release — I thought it would be neat to compile an Overprice Index using the same data set I used to generate the popular U.S. house price heat map animation.

Based on gov’t historical local growth rate data for homes in each metropolitan statistical area (MSA) going back to 1975, this table ranks each surveyed city from most overvalued to most undervalued. Assuming that the inflation-adjusted same-house sale price growth rate trend (rightmost number) continues, this table lets you see at a glance how hot (or not) a particular metro area is and how much of a home price premium you’d typically pay (or discount you’d get) if you bought a home there today.