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The Pricing Puzzle

Depending on which particular report you happen to be reading, home prices across the nation are either plummeting or holding steady in the positive. Two surveys out this week come to very different conclusions, while another report out last Friday throws a wrench in box.

According to the S&P/Case-Shiller Home Price Index, prices in the nation’s top twenty metro markets dropped 1.4% in the first quarter of 2007 from the same quarter a year ago. Detroit (-8.4%), San Diego (-6.0%), Boston (-4.9%) and Washington, DC (-4.8%) led declines.

“There is no sign that we’re at a bottom. It would be very nice to say we see a bottom developing, but we don’t,” said David Blitzer of Standard and Poor's. “We see a pattern that very much echoes the experience in 1989, 1990, and 1991 and that suggests this decline has somewhat further to go.”.

Big Markets Tell One Story ...

The S&P/Case-Shiller report focuses on the big urban markets, that is, the bulk of the markets that led the real estate boom of the last half decade. Markets like Las Vegas, Phoenix and Miami have fallen way off the double-digit appreciation they were seeing just a few years ago. “Phoenix had reported a growth rate of 49.3% in September of ’05,” the report states. It is now down 3%.

“What we’re finding is it’s really generalized weakness in the market,” says Blitzer. But that’s not the full picture because these are the most expensive urban markets. The survey does not cover the rest of the country.

In contrast, the Office of Federal Housing Enterprise Oversight (OFHEO) released its quarterly home price appreciation report this week: “U.S. House Price Appreciation Rate Remains Slow, But Positive,” the headline reads. OFHEO’s report says home price were 4.3% higher in the first quarter of 2007 as compared to the same quarter of 2006. “Although some forecasters expected to see a drop in the HPI, nationwide house prices continued to rise in the first quarter of 2007, albeit at the lowest rate in 10 years,” said OFHEO director James B. Lockhart. Seven states, including Florida and California did show home price depreciation in the first quarter.

“Places where things have been strong are becoming weak. If we look at our list of top 20 house appreciation markets a couple of years ago, it looks an awful lot like our worst 20 now,” says OFHEO economist Patrick Lawler.

... Other Markets Tell Another

So why the discrepancy between the two reports? Prices. The S&P/Case-Shiller report only covers the top 20 metro markets, that is, some of the priciest housing markets in the country, while the OFHEO report gets its data from Fannie Mae and Freddie Mac, mortgage originators who work on the lower end of the home price scale. So the more expensive homes are falling faster.

This is likely the reason that yet another price report, that of the National Association of Realtors, is even further in the negative. The NAR reports that home prices nationwide fell 1.8% in the first quarter of this year from a year ago. “Long-term financing remains favorable, but interest rates are rising,” says NAR president Pat V. Combs.

The NAR’s number differs from OFHEO’s because the Realtors are looking at the median home price in the United States and comparing it to the median home price a year ago. This means that if more lower-priced homes are selling than higher priced, then the median price comes down. It doesn’t necessarily mean that the price of all homes on average is down nearly 2%.

What It Means For Affordability

All the pricing data this week leads one to ask if affordability is finally coming back into the stratosphere. The answer, unfortunately, is no. Affordability is slightly better than it was just two years ago, but all those “exotic” mortgage products, the fuel behind the recent real estate boom, artificially skewed affordability.

“Because of the alternative mortgage instruments and the adjustable rates and the option arms, the interest-only mortgages, for most households the affordability has not gone down as rapidly as prices have risen,” says Raphael Bostic, professor of real estate at the University of Southern California.

Affordability also does not take into account the ten trillion dollars in home equity that Americans have sucked out of their homes in the last ten years. “This is a real concern because families have used their homes as piggy banks, as sources of funds to do a host of other things so there's actually an extra burden that is not reflected in the numbers that come out on a monthly basis,” adds Bostic.

As prices continue to fall at the high and the low end, some homeowners will find that the equity they took out is no longer intrinsically in the house. If they don’t have to sell, then they can afford to wait the market out. For others, the price scenario doesn’t add up quite so neatly.

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