RealEstateEconomyWatch.com

As the nation’s housing sector continues to sink, we are becoming increasingly preoccupied with monitoring and interpreting housing data. We are looking for any positive sign that the housing markets are turning the corner and recovery is within sight.

Our ability to identify the turning point in the cycle—when the recovery begins—is important for planning purposes for real estate, lending and homebuilding companies. It is also important for hedge funds and investment funds that have serious money invested in the real estate sector. And it is important for real estate analysts who monitor and measure the performance of publicly traded companies involved in the real estate business.

But the long and harsh downturn in the real estate industry has clouded some of the key indicators of housing activity. Using history
as a guide for some of these measures may not be a reliable approach in monitoring changes in the housing sector. Below are some of the indicators that are no longer as reliable as they once were for monitoring housing activity.

Months’ Supply
Months’ supply measures the amount of time it takes to deplete the current inventory of homes available for sale at the current sales pace. Usually reliable, the increasing number of foreclosure properties available for sale has dominated this measure. According to the National Association of Realtors, 45 percent of existing home sales in December were foreclosure sales. Foreclosures affect both the numerator and denominator in the months’ supply measure. Foreclosed properties for sale have markedly increased the inventory of homes available for sale, while foreclosed sales have increased the pace of sales. A sharp increase in inventory due to a rise in foreclosed properties entering the market could increase the months’ supply number, while a sharp increase in home sales due to foreclosure sales could reduce the months’ supply number. In both cases, foreclosure
activity is clouding the true underlying demand and supply for home sales.

Weekly Purchase Mortgage Application Index
Historically, the Mortgage Bankers Association’s weekly purchase application index has been a reliable indicator of future home sales. But recently,
the fallout rate (going from application to loan closing) has been erratic and relatively high. Loan documentation requirements and lags and appraisal problems have been the primary contributors to a borrower falling out from application to a loan closing. Thus, an increase in the purchase index may not necessarily indicate an increase in future home sales (closings)  ecause a high number of applicants might have fallen out of the pipeline due to documentation and appraisal problems.

A rule of thumb used to be that a one percentage point decrease in mortgage rates would increase home sales by 250,000 units. This rule of thumb no longer applies in today’s housing market downturn. The relationship between mortgage rates and home sales has broken down due to the economic recession and negative psychology. Many households just do not have the financial wherewithal (e.g., a lost job) to purchase a home no matter how low mortgage rates end up. Similarly, lower mortgage rates will not entice households who believe that home prices are going to be lower in the future (negative psychology).

The Case-Shiller home price index for 20 cities is the most highly quoted price index in the nation today. But the index only reflects home price changes in 20 cities, while the National Association of Realtors, NAR, median
home price measure and the OFHEO home price measure reflect well over 150 metros across the nation.

And there are major differences in the magnitude of these home price measures. For example, the latest Case-Shiller home price index for November decreased 18.2 percent year over year, while the NAR median home price measure (year-over-year) declined by only 3.2 percent in November.