Case-Shiller: Is it Really THAT Bad?
By: Stan Humphries, Chief Economist | April 2, 2009
The latest Case-Shiller numbers for the month of January were released a couple days ago, and they showed a year-over-year decline of almost 19% in the composite index of 20 markets. That’s a whopper of a decline. Could the real estate market really be that bad? Well, as it turns out, it really depends on what you consider to be the “market.”
According to Standard & Poor’s, the Case-Shiller Index is “designed to measure increases or decreases in the market value of residential real estate.” It’s important to note, however, that “market value” according to Case-Shiller includes all arms-length sales of homes, even those of foreclosed homes. It’s really an indicator of the change in prices of homes regardless of the circumstances under which they are sold.
What won’t surprise many people, however, is that there’s actually a very large difference in prices between foreclosure and non-foreclosure homes. For example, Figure 1 below shows the difference between the median sale price of foreclosure and non-foreclosure homes in the San Francisco Bay Area. As you can see, these are two very distinct markets. The median price of foreclosures in December 2008 was 47% of non-foreclosure homes (this ratio reached its zenith of between 75% to 90% during the height of the market between 2003 and 2006). And in December, foreclosure transactions represented 60% of all real estate transactions recorded in the San Francisco metro region, meaning that any measure that includes both types of transactions is significantly influenced by foreclosure transactions.
A measure of real estate appreciation built using non-foreclosure transactions (like the Zillow Home Value Index) is essentially looking at the change in the value of homes making up the black line in Figure 1. By including foreclosure transactions in such a measure (as Case-Shiller does), you’re also looking at the depreciation of homes that were previously in the set of homes making up the black line, but went into foreclosure, thus becoming part of the set of homes making up the red line. Understandably, price depreciation is quite high for these homes given that they move from one (higher) market to another (lower) market rather than simply moving within the same market. Note that even indexes based entirely on non-foreclosure transactions are influenced by foreclosure transactions to the degree that foreclosure sale prices influence non-foreclosure sale prices. They just don’t consider foreclosure sale prices directly.
To get some sense of the difference that including foreclosures can make on a measure of appreciation, we compare in Table 1 the Case-Shiller Index to the Zillow Home Value Index (ZHVI) since the latter does not include foreclosure sales in its calculation (note that the inclusion of foreclosure sales does not account for all the differences between the two indexes). The Case-Shiller numbers are uniformly lower than the ZHVI, particularly in areas with either high rates of foreclosures or in areas where there is a large difference between the median prices of foreclosures and non-foreclosures (indicated by a lower ratio of foreclosure to non-foreclosure prices).
Unfortunately, in combining both foreclosures and non-foreclosures into a single metric, you’re not really getting a good insight into either market. In the current climate, you’re underestimating the decline in value of foreclosed homes and overestimating the decline in value of non-foreclosure homes. More importantly, from a consumer perspective, homeowners probably infer that home price indexes are a general indication of the real estate appreciation that they might realize if they were to sell their own home. In interpreting appreciation information from this perspective, it is likely that homeowners assume implicitly that they would sell their home on the open market, not have it foreclosed upon. For homeowners thinking in this way, Case-Shiller is not a good measure for them to use because the assumptions used to interpret the data do not match the assumptions used to create the data.
So, when you think of your “market,” if you think about what has happened to the price that your home might fetch on the open market (and you don’t intend to foreclose), things aren’t as bad as the Case-Shiller Index would lead you to believe. It’s closer to what the Zillow Home Value Index indicates for your area (available right down to your ZIP Code).
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Comments
46 Comments so far
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Basil Hayden on April 2, 2009 11:59 am
Stan, I don’t follow your logic. If I’m looking for a home in San Francisco, I don’t care whether I’m buying it out of foreclosure or not. It’s just a home.
Let’s say House A and House B are identical except A is in foreclosure. If I pay the bank $1 million for House A, it seems to me that’s what House B is “worth,” even if the owner of House B bought his place for $1.5 million and won’t sell it for a penny less.
Matt Carter on April 2, 2009 12:03 pm
OK, so depending on which methodology you use, there’s a double digit difference in year-over-year price declines in two markets: San Francisco and Phoenix. Zillow has San Francisco down 17.3 percent, instead of 31.2 percent in Case-Shiller, and Phoenix is down by 22.3 percent, instead of 34 percent from Case-Shiller.
But you get pretty much the same results (+ or - 3 percent) as Case-Shiller in eight markets (Denver, Boston, Charlotte, New York, Cleveland, Portland, Dallas and Seattle). If you exclude foreclosures, you actually end up showing slightly bigger price declines in Denver and Boston.
Zillow and Case-Shiller are within 5 percent in four other markets — Los Angeles, San Diego, Washington D.C., and Miami.
So maybe the takeaway here is not so much that “things aren’t as bad as the Case-Shiller Index would lead you to believe” but your other point: That “even indexes based entirely on non-foreclosure transactions are influenced by foreclosure transactions to the degree that foreclosure sale prices influence non-foreclosure sale prices. They just don’t consider foreclosure sale prices directly.”
In other words, there may be two markets (distressed and non-distressed properties), but one is definitely influencing the other.
DebtFree on April 2, 2009 12:37 pm
RE: [Shiller Index] “is really an indicator of the change in prices of homes regardless of the circumstances under which they are sold.”
Well THAT is “the market,” the circumstances behind the transactions are irrelevant. There’s only one housing market, not two.
And “the market” was not supported by reality (incomes) these past few years, but fancy loans the “owners” could never repay.
Look for another 20% plus decline in the next 12-18 months. Then a flat, lengthy bottom (years) of stagnant prices. No V-shaped recovery, but an L-shaped one.
Lynn Byrne - Daytona Real Estate on April 2, 2009 12:42 pm
Daytona Beach has many foreclosure and pre-foreclosure properties on the market. What happens to the numbers when short sales are considered?
Yes there are two markets in Daytona Beach: distressed and non-distressed. I’m selling homes and during the past year, only three of the homes have been non-distressed. Buyers are hunting for bargains and not willing to pay non-distressed prices unless the seller is willing to match the prevailing market price.
Neither Zillow or Case-Shiller is an exact science and both numbers are useful. I believe the shock will come in a few years when the distressed properties have worked through the markets and prices will rebound to the Zillow range.
Your post adds perspective to the market. Thanks.
Stan Humphries on April 2, 2009 1:22 pm
Hi Basil. Differences in prices between foreclosure and non-foreclosure homes primarily arise from two factors: quality of the inventory (e.g., foreclosures are often in worse physical condition than non-foreclosures, are empty when shown to buyers, and might not show well to potential buyers) and motivation of the seller (i.e., how long they are willing to let the home remain on the marker). Regarding the latter point, homes are expensive, infrequent transactions and this fact creates conditions where all the potential buyers for a given home may not be “in market” at the time when the home is first put up for sale (this is why auction models for selling regular homes often prove very difficult in practice). While banks desire to maximize revenue from the sale of a foreclosed home, there are also powerful internal incentives that lead them to want to clear foreclosed properties off their books as soon as possible. This desire to obtain a transaction quickly can often result in a lower price than a seller who’s willing to wait for the right buyer.
Empirically, the substantial differences in median sale prices between foreclosures and non-foreclosures (shown above in San Francisco but found in almost all markets) strongly suggest the presence of two distinct markets. Your natural rejoinder to this fact would be that the types of homes in the two markets are substantially different and it is this fact, not the nature of the transaction itself, that creates the difference in prices. It’s a good point. And one that deserves a bit of analysis and another blog post soon (examining price differences between foreclosures and non-foreclosures, controlling for other factors). Thanks for the comment.
WhipSawFX on April 2, 2009 1:38 pm
Basil Hayden
If you take a look at foreclosed homes, a lot of them are in a poor state of repair as their owners cannot afford to maintain them … hence why they end up in foreclosure, additionally a lot owners take vengence out on the property … go take a look and you will see a difference.
Stan Humphries, analysis holds as much weight as Case-Shiller when they exclude properties which have been improved with additional sqft etc …
That being said, I believe Case-Shiller is a more accurate representation of the ‘Market’ than the ZHVI … which neglects the fact that a large number of properties are unsalable at significant discounts to the ZHVI.
Stan Humphries, it would be useful to include with figure 1, the reletive volume in the distressed / non distressed markets, as this would demonstrate that fact that most sales are distressed, as owners are incapable of decreasing the price of their property (below what they owe) to match the ‘Market’ unless the sale becomes distressed … I believe that is why figure 1 illustrates that the distressed / non-distessed spread is increasing in recent months.
Stan Humphries on April 2, 2009 1:45 pm
@Matt. Yes, foreclosures are definitely a powerful influence on non-foreclosures, a key dynamic that creates a powerful vicious cycle in the housing recession: declining prices -> negative equity -> foreclosures -> declining prices. While a powerful influence, however, foreclosures are arguably not the same market as non-foreclosures.
@DebtFree. See my comments directed to Basil about one market. Worthy of more analysis definitely. And I agree that many markets still have a way to unwind. A couple different ways that they could unwind, of course: flatten sooner but stay flat longer versus drop more near-term and stay flat for less time long-term. We’re working on analyses in some markets that bear on your point here and we’ll post when done.
@Lynn. Thanks for the perspective about your market. You say there are two markets there, but that buyers aren’t willing to pay non-distressed prices. So are you able to discern price differences between distressed and non-distressed at all? If not, then Basil and DebtFree’s point could hold for your market which would be quite interesting.
@WhipSawFX. Need to digest your remarks and will respond shortly.
Thanks.
DebtFree on April 2, 2009 1:51 pm
RE: “there are also powerful internal incentives that lead [banks] to want to clear foreclosed properties off their books as soon as possible.”
This thinking is a somewhat behind the times. Today lenders are keeping foreclosed properties off the market so that they don’t have to record the losses on their books. A foreclosed house that’s today worth $250,000 (with $500,000 in defaulted HELOC debt) is a massive unrecorded liability. Multiply by countless homes across the nation.
From your comments and line of reasoning (which are intelligent and well intentioned) it seems you don’t fully appreciate the magnitude of the now-burst real estate bubble.
In most metro areas home prices DOUBLED (and more) in just a few years. This is not normal. Salaries have been flat for a decade, with our good paying manufacturing and tech industries getting shipped overseas. Risky mortgages, not income, allowed the run-up in house prices. And as we’ve seen, people could not service the massive amounts of debt for which they signed on.
Your chart above starts at 1996, but have a look at US home prices going back 100 years:
graphics.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
(copy and paste link)
Looking at the 100-year chart at the above link, it’s clear significant further price declines are in order — think 40-50% peak to trough. Peak is 2005, trough is 2012. Such a price decline can only be viewed as “bad” if one views a correction (prices returning to normal) as “bad.”
DebtFree on April 2, 2009 1:53 pm
Stan, was typing as you posted. Looking forward to that upcoming market analysis.
azrob on April 2, 2009 2:00 pm
Lets correct your numbers on Phoenix:
March sales in Phoenix 7700 give or take, of which only 1800 were NOT marked as Bank owned or Short sale on the mls.
However, in a quick analysis, quite a few of that 1800 actually were bank owned. (rough estimate 15%)How is that possible? well, it turns out agents aren’t generally smart enough to fill out the entry form correctly, but in the property description, it will say, “bank owned sold as is…” while the bank owned flag has not been set.
So, in reality, about 1500 homes changed hands between individuals, while 5500 were bank owned, and another 700 were short sales.
bank owned is the market, there is no other!
Lynn Byrne - Daytona Real Estate on April 2, 2009 2:30 pm
Stan,
To answer your question, “So are you able to discern price differences between distressed and non-distressed at all?” The short answer is no.
My experience shows that actual sale prices are based on distressed prices for similar properties. REO properties that have been trashed are not similar to a well maintained equivalent. That being said, there are a lot of well maintained distressed properties in my market.
Many non-distressed sellers just can not, or will not compete. They have been chasing the market down with price reductions that still keep them non-competitive. Inventories are through the roof at about 6,000 homes and condos listed. That’s about 22 months of inventory. Further, over 90% of our sales are under $300K and 75%+ are under $200K. Little is selling in the higher price ranges. Six months ago, the lowest priced condo in Ormond Beach was $119,000. Today, there are 13 under $100,000 for sale.
Azrob’s point is well taken here as well. The data, when aggregated, is only as accurate as what’s entered in the MLS and other sources. Up until a few months ago, there was no way to classify distressed properties in our local MLS, further skewing the data.
Some banks are getting much better at reviewing and approving/disapproving offers for distressed properties. I’ve had several cases of same day answers. Some are setting prices to the point where they are getting multiple bids and holding mini-auctions with bring your best offer deadlines.
In the end, I believe prices will not rise until the distressed inventories are reduced significantly.
Regards
Will Seton on April 2, 2009 9:41 pm
Basil Hayden you are spot-on! The logistics of **how** supply is brought to market is irrelevant to market demand.
If a pack of gum is delivered to your 7-11 via truck, train, bus, or plane… you don’t care… it is worth $.75.
Same with houses… if a condo at 4th and Mission in San Francisco is brought to market via foreclosure, short sale, traditional, developer, court sale… you don’t care… it is just a home.
Paul - Las Vegas Real Estate on April 2, 2009 10:04 pm
Interesting… Instead of pointing out something, I have a real life scenario for you to consider.
Two neighborhoods seperated by a main street. Same builder… built around the same time with similar floorplans but recorded under seperate subdivisions.
My short sale listing is in the neighborhood on the North Side of the Street and the most recent sales suggest one price even though there have been little recent sales… we use the neighborhood’s comparative market value and list the home right on the numbers for that neighborhood.
The neighborhood on the South Side of the Street has been hit hard with foreclosures and market values are aroud $30,000 lower… but there are multiple sales taking place.
After a couple of months with little activity we take the shot and reduce the price down to be comparable/competitive with the neighborhood across the street… we get a buyer and proceed with the short sale.
The appraiser for the lender taking the loss comes in and appraises the home higher with the older sales numbers from the same neighborhood our listing is in. Obviously, the lender wants more then the offer we had on the property due to the appraisal.
After I perform quite an extensive report detailing both neighborhoods and submit it to the loss mitigator with some other calculations… the lender accepts the offer we have on the property, approves the short sale and takes the loss.
Can You Answer Why?
More Thoughts…..
All things being the same… the buyer does not care if the home is a foreclosure, short sale or whatever… they care about the price and condition of the home.
I’ve never come across a buyer who was willing to pay more for a home just because it was Not a Foreclosure or short sale. They will however.. pay more if the property is in better condition.
Lenders want as much as possible for their homes also.. they are just not going to sit around for months at a time waiting for a buyer since Time is also a factor in net proceeds when selling. (Time Value of Money.)
$150,000 today is worth more then $150,000 in three months…
I see where you are going in comparing the Zillow Value Home Index (ZVHI) to the Case-Shiller numbers and it is somewhat noble in excluding foreclosure activity as a measurement since foreclosures are so misunderstood with fairy tale myths..
However… the fact of the matter is that homes are going to foreclosure because they can’t be sold to cover what is owed on the mortgage.
Lenders also want the most money possible to make up these huge losses and don’t just stick any low ball price on a property. Time is a factor and unlike the normal seller who does not understand this… the lenders for the most part do.
Interestingly… we just closed a short sale that was purchased as a foreclosure a little over a year ago. Not such a great deal as the ZVHI would imply since foreclosures are valued lower then median home values.
Now I know why so many buyers only focus on Foreclosures????? According to your theory of a seperate market… this market is valued/priced lower and buyers should not even look at the other.
Or are we trying to make home sellers feel better?
Hmmmm…
Forex News Blogs » Blog Archive » Friday morning links on April 3, 2009 7:04 am
[...] Loan modifications rise; many don’t pare payments - AP• Case-Shiller: Is it Really THAT Bad? - Zillow.com• Home builders, California Realtors offer layoff insurance - LA Land• Sixth of [...]
Jeff Allen -- Minneapolis Area Association of Realtors on April 3, 2009 8:21 am
Great stuff.
We do a similar analysis here as part of our Quarterly Foreclosures and Short Sales Report based off of MLS data: http://www.mplsrealtor.com/downloads/market/Reports_Analysis/Foreclosures-and-Short-Sales-in-the-Twin-Cities-Housing-Market-Q4.pdf.
There are dramatic price differences in the two market segments. Here’s a blog post on the same subject from our blog: http://mplsrealtor.typepad.com/theskinny/2009/04/two-stories-that-explain-each-other-perfectly.html.
Keep up the good work.
Jeff Allen
Research Manager
Minneapolis Area Association of Realtors
Zillow vs. Case-Shiller - What You Need to Know | Tools For Real Estate on April 3, 2009 9:07 am
[...] foreclosure is typically lower than one that is not in foreclosure, as shown by the first graph in this Zillow article. (Clicking on the graph in the article brings up a more clear [...]
Clem on April 3, 2009 9:37 am
Stan’s data clearly points out that there are two distinct markets. It’s interesting to see agents argue that there is only 1 market, foreclosures. The agents making those claims come from Floria, Vegas and Phoenix, some of the most distressed areas in the nation. I visited several foreclosures down in phoenix about a year ago. Many of them were trashed, oil on the rug, missing appliances, kitchen cabintes gone. Are we at a point where foreclosures are as good as currently owned homes? In some areas, probably. My guess is most foreclosures are further out of town. Phoenix for example - foreclosures are high in queens creek, mesa, maricopa (city, not county) and other out lying areas. Are there a ton of foreclosures on central ave slightly north of downtown phoenix (nice area)? I’d bet there are two distinct markets there. But when approaching Mesa, Queens creek and Maricopa, it’s only foreclosures. Infact, new homes in Maricopa are selling higher than foreclsoures. Not a lot, but they start out more.
1 note - in these distressed markets, i’d be looking at a foreclosure. I’d be trying to get into the best neighborhood I could, best schools. With the deals out there on a foreclosure, i’d be willing to live with a property that not in the best of shape. Why pay more?
Boston Real Estate Blog : Blog Archive : Zillow vs Case-Shiller Housing Report on April 3, 2009 10:25 am
[...] Humphries, writing on the Zillow blog, notes that Zillow’s price index didn’t fall as much as [...]
Stan Humphries on April 3, 2009 11:07 am
@WhipSawFX. I’ll send you the chart on foreclosure volume, but you’re correct that foreclosures as a percentage of transactions have increased as the ratio of foreclosure/non-foreclosure median price has decreased. It’s an interesting hypothesis. But, if true, who’s buying the non-foreclosure homes at the higher prices?
@DebtFree. Yes, looks like our comments passed each other electronically yesterday. Just to restate, I don’t disagree that many markets have a way to unwind. But this is separate issue in my mind from whether there are, in fact, two markets, and thus which kinds of transactions one should include in an index. On the issue of home prices in an historical context, more about that later as promised.
@azrob. Thanks for contributing the local MLS numbers. Our numbers are based off of public records (and are for Dec 2008, not March 2009), but they seem in the ballpark of your numbers. As much as I look at these numbers all day long, I’m still a bit shocked each time I think of a market like Phoenix or Central Valley CA with that high a percentage of foreclosures. It is , quite simply, staggering.
@Lynn. Interesting data point in your market about price differences between distress/non-distress for same quality home. One more vote for an analysis that controls for the inventory characteristics. I definitely agree with your closing point. Prices are ultimately a function of supply and demand and supply is currently high. New home buyers snatching up foreclosures will definitely help (as recent statistics suggest is happening). But there will continue to be substantial upward pressure on supply as declining prices fuel negative equity which, in turn, becomes the dry tender that can be sparked into foreclosures due to household economic shocks (think job losses in the current economy). There’s also a fair amount of “shadow inventory” in the market right now, defined as for-sale inventory that is not currently on the market but that will come onto the market given some modest improvement in home sales. This inventory is analogous to the unemployment statistics which don’t capture the number of workers who are unemployed right now but are no longer looking for work (and thus aren’t captured in the official unemployment numbers).
@Will. Looks like you’re in the camp that will need more data before you’re even close to convinced. Fair enough.
@Paul. Regarding your closing point that seems to suggest that the prices for the non-foreclosure market are just for the benefit of the sellers ego (might have misunderstood you here, so apologies if so). Remember, data here is sales data not listing data so somebody is actually paying more for the non-foreclosure homes than the foreclosure ones (unless they are different types of homes which we’ll take a look at shortly).
@Jeff. Very cool analyses. Do you have a breakout of the 32% of Q4 transactions that were lender-mediated by whether they were foreclosures versus short-sales? I’m curious how well our public record sources track your data. Also, enjoyed the blog post very much. Your Takeaway #2 is what motivated our creation of the ZHVI. Thanks.
@Clem. Good points and local perspective. In the upcoming analysis of foreclosure/non-foreclosure prices controlling for housing attributes, we’ll make sure to control for location as well.
Paul - Las Vegas Real Estate on April 3, 2009 12:39 pm
Stan,
Not suggesting you are stroking egos with my closing comment…. but automatically classifying all foreclosures as trashed or need work and of a lower quality — therefore should be considered a seperate and lower market.. is something that currently just does not hold water. (Unless you go through each and every foreclosure and gauge the condition of the home.)
The current situation is a little different then 8 years ago when I was representing buyers for foreclosures that would come through. Back then… more often then not they were trashed and unsellable without a lot of work that the homeowner had no money to do before letting it go to foreclosure.
Today… we have several newer homes that were merely a product of the get rich quick days of flipping and homes were merely purchased to sell after purchasing…. or purchased because “they go up in price with each phase” that was pushed by new home agents. I have no problem finding foreclosures that were never even lived in.
Ironically… until recently… the new home sales and resale market were treated seperately with new home sales being higher then the resales in Las Vegas and look where that got us.
Some of the neighborhoods hit the hardest with foreclosures are the ones built during the peak of the real estate market. Automatically justifying higher prices because it was a “new home” was a joke considering some of the “new home” subdivisions that were built when builders were more concerned on how to squeeze as many homes in a subdivision as possible with questionable quality.
Let’s also look at the type of financing used during the peak and how that got home buyers into trouble and ended up in foreclosure.
Yes… agents in areas that have seen hundreds of foreclosures in Florida, Arizona and Las Vegas are going to suggest that there are not two markets because we’ve seen them and have actual experience in the market.
Over 60% of our sales in Las Vegas are Foreclosures and it’s because buyers are going after the best price and condition is always considered… I certainly don’t know too many people who want to part with their cash fixing up properties with the current state of the economy.
Dealing with banks on the buyers side for foreclosures is something we certainly don’t get too thrilled about considering some of the tactics… but we really have no choice unless home sellers can price their homes to compete. Which many can’t without it being a short sale because of the loss of equity.
Without buyers.. you have no market or no sales to gauge and buyers want the best price. Price your home higher just because it’s not a foreclosure will more then likely end up being another expired statistic in our MLS.
Market Update: Steps In The Right Direction « ALL ABOUT…..Portland.Oregon.Real Estate on April 4, 2009 1:07 am
[...] our RMLS stats are the most accurate because I can narrow the searches. However, recently I read an article on Zillow comparing Case-Shiller numbers with Zillow numbers and I thought it was interesting. Each reflects [...]
rjon.101 on April 4, 2009 12:12 pm
Stan;
I read your article and found it interesting; I have wondered why the Zillow index is consistently 30% above reality in my area. When I look at Zillows pricing I see zillows average and many times the bottom range at 30% above both listing price and a recent similar sales price, i wondered why! I thought it was because zillow was using the price the bank bought the house back for at the foreclosure auction (CA process) which is significantly above what it will sell for when the bank lists the property as a REO. The bank buy back price is a number that should be omitted since the house did not sell at that price to a willing buyer, the bank had to buy it at that price. But to try to say the pricing of foreclosure sales listed and sold as REO properties to the public is not part of the market pricing and not use them to determine market pricing is cherry picking data to obtain a certain result. In my area, if using just zillow estimates, a buyer would over pay or a seller would never sell or get mad that all offers are always 30% low or to use their technical terms “just way too low.” I have not looked at Case Shiller index choices verses the the Zillow index results for other cities but does your San Fransisco example work against all the other Case Shiller indexes or are you picking your data in using San Francisco?(meant as a question not an insult) San Francisco can be very unique. Case Shiller was designed to omitt as much as possible any data that distorts reality, or wild card data, in trending directions and % change of the market. Case-Shiller is not an appraisal method for a specific house in a particular market any more than zillow is, but with todays technology it is nice to be really accurate. In 2005 and 2006 I read several articles written by economists from the federal reserve(these are the best and brightest) explaining why real estate would not see the bust being predicted, it would just go flat for a few years. They were very very wrong. They used the wrong data; to me, they ignored reality.
Reality of market pricing is that foreclosures listed and sold on the market affect and are part of pricing and can not be ignored. For interest and statistics it is interesting to see the two sets of data but to ignore the forclosure pricing as not part of market pricing is to ignore reality, like the feds ignored the results of subprime and Alt A loans even though they were nice in theory. I will buy a forclosure just as fast as a non forclosure, it is just a matter of price.
I read above that many forclosures are in bad shape which results in lower pricing but I have found that the ratio of good shape to bad shape foreclosures is the same as good shape to bad shape non forclosures. And if a non forclosure is 100,000 above a forclosure and 10,000 can fix up the non forclosure, I’ll spend the 10k and save 90K. At least qaulify your pricing methods next to the zillow estimates saying they would be lower if REO sales data was averaged
in. Also I have never heard of anyone who was buying a house seperate the foreclosure market into a seperate market. Houses are all just houses for sale to the people out looking to buy.
But to always end with a really good comment I would like to say Zillow has the very best graphics and pictures I can find which is why I use it (and ignore the pricing statistics) but I do appreciate the sales price data from the county records which is another big reason to use zillow. Does zillow collect its own data or buy data from a original source?
Christian G. Warden on April 4, 2009 12:24 pm
There are two (or rather, many) different markets, but they are not the foreclosure market versus the non-foreclosure market. They are different geographic markets poorly grouped together into the San Francisco metropolitan area. The foreclosure sales are occurring much more often in the areas that either crime-ridden or a two-hour commute from where people are employed. A same-property-sales index like Case-Shiller that was broken down by zip code or even county would be much more useful.
ML on April 4, 2009 2:54 pm
1. It’d be interesting to see how many data points you have for non-foreclosed homes. If it’s a low number, then we cannot say the difference between distressed and non-distressed is statistically significant.
2. It’d also be interesting to see the actual price points for distressed and non-distressed homes (appraised or pre-crisis prices). My guess is that the non-distressed homes represent a different type of neighborhood and residents. These buyers segments have different supply and demand curves. Perhaps for the upper-income segment, which tends to target areas with non-distressed homes, job loss is less prevalent and therefore supply and demand don’t change that much. So the difference is explained by the types of homes and buyers, not the type of sale.
3. The difference between foreclosed and non-foreclosed prices has always existed, has it not? It’d be interesting to see if the crisis amplify the difference. If the difference now is not bigger than the difference before subprime mortgage become prevalent, then perhaps the difference is due to the type of transaction. Otherwise, the location and types of buyers are more likely to be the cause of the discrepancies.
rp on April 5, 2009 8:15 am
interesting debate. I had been wondering why the house in my neibhborhood always seems to sell well below Zillow estimates. I live in an NYC affluent suburb where foreclosure sales are minimal. I think Zillow is late to adjust. Real estate like any investment is a golden chain. someone has to buy your house if you want to sell it. that means, if the bottom of the chain can’t afford to buy it has an impact up to the top of the chain. This is the famous “plankton effect” discribed by Bill Gross from Pimco. And you can debate all you want about the real and distress market action, those two are part of the same market. http://www.ritholtz.com/blog/wp-content/uploads/2009/02/20090220175230.gif I think these charts will remind you how out of synch housing price were a few months ago. Excessive lending affordability is gone for ever. I just hope house prices we won’t overshoot on the downside.
Curious Cat Investing and Economics Carnival #1 at Curious Cat Investing and Economics Blog on April 5, 2009 8:15 am
[...] Case-Shiller: Is it Really THAT Bad? by Stan Humphries - “Unfortunately, in combining both foreclosures and non-foreclosures into a single metric, you’re not really getting a good insight into either market. In the current climate, you’re underestimating the decline in value of foreclosed homes and overestimating the decline in value of non-foreclosure homes.” [...]
Carnival of Real Estate! — Arizona Real Estate Notebook on April 5, 2009 3:32 pm
[...] Humphries presents Case-Shiller: Is it Really THAT Bad? posted at Zillow [...]
Kary L. Krismer on April 6, 2009 10:40 am
I think this entire piece is just wrong. This is from page 18 of the Case-Shiller methodology PDF:
“The most typical types of non-arms-length transactions are property transfers between family
members and repossessions of properties by mortgage lenders at the beginning of foreclosure proceedings. Subsequent sales by mortgage lenders of foreclosed properties are included in repeat sale pairs, because they are arms-length transactions.”
Thus they seemingly exclude foreclosure sales, but will include an REO sale that occurs afterward. They also throw out other sales where the price appears too high or too low.
Also, for the Seattle area, if you look at the NWMLS mean and median numbers, and Case Shiller, the Case Shiller numbers are showing the smallest decline from the peak.
Classic Homes Northwest » Blog Archive » Does Price Matter? How the National Press Impacts Local Markets on April 6, 2009 11:11 am
[...] I read the article many of the points that were brought up seem very valid. Stan Humphries of Zillow was questioning the S&P Home Price Indices which claim that values of a typical house in Pierce, King and Snohomish Counties dropped 15% in [...]
DebtFree on April 6, 2009 11:26 am
RE: “Price your home higher just because it’s not a foreclosure will more than likely end up being another expired statistic in our MLS.”
Bingo Paul.
Leanne Finlay on April 6, 2009 11:43 am
In Seattle, close-in neighborhoods, foreclosures are not as significant in numbers than in outlying areas, or areas of high numbers of new/newer construction.
Lenders don’t seem to be choosing real estate companies very well to list and market their REO properties — most bank-owned listings simply don’t compete well from a marketing standpoint (photographs, cleanliness, supply of flyers in an exterior flyerbox, web presence and the like).
There are a lot of issues in every marketplace, and staunching the flow of foreclosures will also help stop rising unemployment.
We’re living with extremes right now - moving out of the extremely-easy financing years to times of extremely difficult financing - and the current extreme is causing far more financial devastation than I think the most expert economists thought would happen.
Dave H on April 6, 2009 12:08 pm
I don’t follow your logic. Even if forclosure homes are a sizeable part of the market, the median will still ignore outliers. If the central part of the market has a relatively uniform distribution, this should make little difference in computing the median. Zillow could always publish their own data, like a 10-15% trimmed mean.
Paul - Las Vegas Real Estate on April 6, 2009 6:10 pm
Today’s News for you,
We get a buyer in for one of our Short sales at $550,000, Chase Mortgage holds the second and holds the seller hostage even though they get nothing if it goes to foreclosure. The First offers Chase $5,000 to release the lien and let the sale proceed… Chase will only take $28,000 and takes over three months to come back with this number. (Even though they get nothing if it goes to foreclosure.)
During the time frame, a similar REO home in the neighborhood comes up for sale, gets a buyer and closes for $80,000 less then what our sale is. This is your foreclosure… or second market as you suggest.
Now the buyers lender appraises the home and it will not appraise today because of the foreclosure sale that took place and dragged down the values. (All because Chase mortgage took three months to make a decision for something just because they hold some worthless paper.)
The first mortgage on the loan will not reduce their approved price…
According to the ZHVI theory.. should I have the Appraiser for the buyers lender call you and you can tell him there are two markets, ignore the foreclosure and appraise the home at a non-foreclosure value?
Good Luck trying to sell that to skittish lenders…
And that sums up the one big mess taking place behind the scenes that is keeping the market from stabilizing.
DebtFree on April 7, 2009 2:07 pm
RE: “staunching the flow of foreclosures will also help stop rising unemployment”
Homes are foreclosing because people couldn’t actually afford to service the debt, and instead could only afford the “pretend debt” in the form of low teaser interest rates before Adjustable Rate Mortgages reset. Once reality kicked in (the ARMs reset), that illusion went “poof.”
The housing market was not real, since the fundamentals (income) were not in line with housing prices. It was a speculative mania, just like the dot com bubble.
As the price CORRECTION continues over the next 18+ months we will see home prices that people can actually afford, based on their income. And it is long overdue that people stop buying things with “equity” (more debt) and instead actually save money and live within their means.
Once we hit bottom (in 2011 or 2012) someone had better come up with a way to keep Americans employed, because our auto industry is dead/dying, and our high paying “white collar” jobs are being shipped overseas en masse.
We have become a society that doesn’t manufacture anything, doesn’t value long term planning, and simply sell each other houses. Who is going to purchase all these “million dollar” houses, when there are no key industries and good jobs left?
TKB on April 7, 2009 2:21 pm
DebtFree, you speak like you know facts, but you don’t reference any.
Many people qualified for their mortgages because they did earn enough money, and many had 20% down payments. This sinkhole has sucked a great many people with formerly “perfect” credit into it, simply because they bought in an area that had massive pricing collapses, along with high unemployment.
This crisis has been going on for nearly 3 years, and every little real help for individual homeowners has happened. As the housing market collapsed, it brought down the job market along with it.
The cycle we were on wasn’t healthy - but letting housing twirl into the toilet is far less healthy because it brings down every job in the US and around the world.
I’d be curious to know if you ever had ‘working man’s hands’ or just a mouth on you? You one of those guys who makes paper money by betting on decline and decay?
TKB on April 7, 2009 2:23 pm
sorry, typo: very little real help for homeowners.
DebtFree on April 7, 2009 3:07 pm
TKB @ 2:21 pm, which facts do you dispute?
Where are these jobs to come from? What do we manufacture? Either salaries in local markets can support home prices, or not. This is not a new concept. Homes do not double in price every 5 years in the real world, because salaries do not double every 5 years.
Do I feel sorry for someone who bought a home at 2005/2006 bubble prices? Not at all. It was obviously a bubble, and we were only a few years past the previous bubble (dot com bubble) so there’s no excuse for failing to see what was obviously another speculative mania.
I have a friend who paid $700,000 in 2005 for a house which sold for $325,000 in 2003. My friend, whom I love to death, is a complete fool for willingly destroying his financial future. He can “afford” to make the payments (for now) but his life is far more difficult than if his mortgage was $400,000 lower. The granite counters are nice, though.
There’s no “solution” to make his house actually worth $700,000 (except the passage of about 10 years). Taxpayers certainly shouldn’t have to foot the bill for such foolishness.
As mentioned, the “job market” did not support home prices, as we are seeing today.
Manassas VA Homes on April 17, 2009 4:41 pm
Case Schiller is off by a full month worth of statistics. The reality is much worse. Many lenders were under a moratorium for new foreclosures during this time. That is just one aspect. March’s numbers were much more dire.
Arlington VA Homes on April 26, 2009 6:48 pm
My guess is it is tame compared to the real facts.
100% mortgage on August 14, 2009 11:08 am
Are these figures a true representation of foreclosures or just a guestimate based upon a small sample?
Jennifer Carney on August 16, 2009 7:51 pm
There may be logic to excudling foreclosures, but Zestimates are also excluding transactions simply because the gap between ask and actual sale is so large, many transactions are tossed out. Check out zip code 11954 - very few foreclosures, but lots of tossed out recent transactions in 2008 and 2009. The resultant poor calculation keeps an artificially high Zestimate…
Cheltenham Letting Agent on September 8, 2009 1:53 am
Hello guys/girls I’m trying to get a feel for the property market, as a comparison to the UK I’m jus trying to put a foreclosure into context as we do not use the term when selling properties. I believe it means to be repossed by the bank and sold to recover the debt. Please advise.
Henal on September 11, 2009 5:40 am
I guess this doesn’t help those who are interested in purchase of a new home or selling their homes for that matter. Are there similar details that don’t include foreclosures and so on?
Henal
Local Advertising on September 19, 2009 4:56 am
19% decline definitely is a bit scary but with inclusion of foreclosure it definitely makes statistics difficult to read. With the drop in dollar values and everyone tightening their belts including I guess the number of foreclosures is probably increasing as well?
Property Mortgage on October 10, 2009 11:04 am
Yes it certainly isn’t helping matters thats for sure.
BuyToLetMortgage on October 23, 2009 4:48 am
At 19% and climbing its hard to digest thats for sure.