October 28, 2009

by Scott Sambucci


The Case-Shiller numbers for August 2009 showed another 1% increase over July, which showed a 1.2% increase over June, surprising many people including Robert Shiller, co-developer of the index. Earlier this week, I suggested that the gains would be “stemmed a bit” so I can’t say that I called the August movement all that precisely, but digging into the numbers and trends of the index does cause me to wonder if the current trend is sustainable.

Check out the graph below of the Case Shiller Index since January 1987 (click here or on the image to view in a larger window…).

Case Shiller Home Price index historical graph

Look at the slope of the red lines.  These are estimates of the index’s growth rates when they are at their steepest since the data begins in January 1987. We know that housing prices cannot feasibly grow at the rates we saw from the late 1990s through June 2006 (see “housing crash” or “homes for sale in Las Vegas”…).  Take the period from January 2000 to June 2006 when the Case Shiller peaked at 226.29 and the index slope was at its highest (approximated by the thick red line) – this is an average annual growth rate of nearly 23%.  Now, consider the rise in the Case Shiller Index in the last couple of months – 1.2% in July, another 1.0% in August (approximated by the thinner red line).  Annualizing these growth rates means that the housing market is now growing at a rate above 15% per year again. Is this recent growth rate sustainable in the long run?

Connecting the complete time series from January 1987 to August 2009 (the yellow line – the index is now at 157.93) works out to an average annual growth rate of about 6.65% since 1987 – a more realistic long run growth rate, if you assume that the August values bring us back to trend.  However, 6.65% growth going forward would require the upcoming index numbers to flatten out in coming months.

To compare, the average annual growth rate from January 1987 to June 2000 works out to about 4.5% annual growth.  Alternately, if the Case Shiller index was at 125 in August 2009, instead of it’s current value of 157.93, that would work out to average annualized growth of 4.3% since January 1987 (the green line).  An index value of 125 would mean that aggregate housing prices would need to correct another 25% which would be a horrific turn, but another dip in home prices in the next 6-12 months has been mentioned by economists Mark Zandi and Nouriel Roubini.

What does all of this mean? The short term bounce due to seasonality, tax credits, and foreclosure-stemming programs are a good thing to inspire confidence in the market, but I share the concerns of others out there warning that these monthly growth rates are unlikely to remain sustainable in the long run – unemployment is still upconsumer confidence is down, and foreclosures are rising.  I promise I’m not competing with Roubini for the title of Dr. Doom, but we’re data-centric people over here so when the numbers don’t match up with this alternate universe known as “the market,” alarms go off and the coffee maker begins convulsing…

Heck, even Robert Shiller is confused by the numbers.  In yesterday’s interview on Bloomberg, Shiller said that the recent index reports are “violating what I’ve learned about the data.”  Here are a few others that warn to heed caution:

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