Here’s a little bit of pushback on the indices showing how terribly elevated home prices are, and why they likely have more to fall.

The WSJ Numbers Guy column, written by Carl Bialik, looks at various indices — Case Shiller, OFHEO FHFA, etc. As the charts at bottom reveal, they all show a boom, elevated prices and a rollover.

“The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.

As the home market surged earlier this decade, the two leading indicators of home prices diverged. One didn’t count homes sold with exotic or subprime mortgages, which fueled much of the bubble. These same properties are often the ones going on the auction block today at severe discounts, pulling the other home-price index down — some say to unrealistic lows.

To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices — some of them available only to paying customers — are adjusting to exclude homes sold by banks.”

I would appreciate it if someone could explain to me the value ofexcluding Bank REOs, foreclosures, and all discounted sales.

To me, this is just the latest variation of inflation ex inflation . . .



Only One Person Knows a Home’s Value: Its Buyer
WSJ, NOVEMBER 21, 2008, 12:41 A.M. ET

Category: Bailouts, Data Analysis, Markets, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “Valuing Homes ex-Foreclosures

  1. More political theater for the greatest hyper-inflationary explosion of monetary assets since … Greenspan.

  2. Jim C says:

    I still find the housing bubble interesting, since I never got to experience it.

    Here in the mid-southwest (Oklahoma), home prices have average 2-4% gains per year pretty steadily. We had a housing bust in the 80s…this is nothing like that. Homes in my neighborhood can sell the week they go on the market or take months – depends more on the house than the price, I think. One guy katty-corner from me has been trying to sell his house for over a year. Problem is, it is built like crap. The guy 3 houses down from him listed his house on a Friday and had a sale pending sign up on Monday.

  3. Renting in Mass says:

    Home prices ex-foreclosures drives me nuts. Both of the entities that provide price data in Massachusetts exclude foreclosures. When I asked the Warren Group about it, they responded that “we thought this would be a more accurate assessment of the market.” Yeah, that makes tons of sense.

    It’s especially annoying because it’s impossible to track changes over time when they change their methodology like that.

  4. larster says:

    The title of the article says it all. During 2005-2006 there were thousands of buyers that did not know the real value of their home. so what is the point of the article?

  5. Winston Munn says:

    This seems to me to be academic. It is the first-time buyer that propels the entire real estate engine into forward gear, so median national prices or even average national prices of all homes sold has no major bearing on affordability of homes.

    Tell me the average price of homes being purchased nationwide by first-time buyers and I may have some information that is of use.

    And therein lies the heart of this problem; as incomes stagnated over the course of the past 8 years, starter home prices should also have stagnated – but didn’t. In order to provide economic stimulus, the Wizards of Supply Side created artificial demand, utilizing make-believe loans that led to wishful-thinking economic stimulus and ficticious profits. A terrific fairy tale.

    Unfortunately for those of us existing in reality, the fake growth chapter of the book is closed and the ending is turning out to be rather Grimm.

  6. rob says:

    Barry, it’s really quite simple to understand the value of excluding Bank REOs, foreclosures, and all discounted sales. Someone (whomever is reporting this index) stands to profit from the “it’s different this time” reporting. People have to be handed an exotic look at something so they think they are smarter than the next guy, and they are usually willing to pay for this exotic look into the crystal ball. As the old saying goes, “Some people have more money than sense” which is proven day in and day out in the market.

  7. Todd in SM says:

    To answer your question Barry, there may be some validity to excluding REOs and the like in certain markets. Here on the westside of LA for example, I have anecdotal evidence of an IRS auctioned home going for $400k just a block from a market price home selling for $700k, all in July-Aug ’08. And another on the market nearby for $1.2m, and likely to sell.

    Distressed sales are neglected homes and have a stigma attached as well. You have areas like mine with homes built in the 1920s next to recently torn down and rebuilt three level modern structures. Then there’s the lazy factor. People with money just don’t want the hassle of hunting for REOs or going to auctions.

    So a case could be made that in some areas there are two markets. Each with average prices that are wildly distinct. Now drive an hour (late at night) east from here, and it’s fire sale everywhere.

  8. Transor Z says:

    I’ll take a stab at answering, Barry.

    Foreclosure sale prices should be excluded from real estate market valuations because they are not representative of what those foreclosed-on homes would have sold for had the owners fit the normal seller profile. Which is to say solvent, able to convey good title to a buyer without outstanding liens, etc.

    Another argument is that the foreclosure auction mechanism is geared toward making the lender whole, not toward recouping full market value. State laws usually pay lip service to a bank’s duty to secure a reasonable price but we all know that foreclosure sales attract bargain hunters and contractor/flippers.

    The title conveyed by a foreclosure sale does not contain the normal warranties that protect buyers in typical home sales.

    Still, and I am sure this is part of what you are getting at, in the aggregate, a glut of homes in foreclosure in an area can only skew real estate prices down, with urban blight the extreme example. I agree that it is silly to simply ignore foreclosures. But I don’t think it’s correct to lump them in with “normal” home sales either.

  9. Well, there are some who don’t believe that “mark to market” is appropriate accounting either.

  10. lalaland says:

    All I know is wait until NYC really joins the fun – the dollar amounts are so insane – it will do 2x-10x as much damage to the balance sheets as a home anywhere else, and I don’t think people can afford million dollar mortgages when they have been laid off with no job prospects. I could be wrong, but… Prices will never decline was something of a religious mantra out here, and the koolaid was drunk with abandon.

    Also, with volatility being the word of the week, I recommend “Mingus Live at Carnegie Hall” for friday night jazz. Rahsaan Roland Kirk’s solos are incredible, and quite, you know, volatile. Hard to find, but a fantastic album with 1 song on each side, a great jam session.

  11. I-Man says:

    I and I agree with you Ritholtz… Whats the point of separating the two???

    Doesnt make any sense to me… An outgoing tide lowers ALL boats.

    If theres a ton of “exotic mortgage” tied homes in your neighborhood in foreclosure, its still going to drag down the value of your “conventional mortgage” tied house.

    Further, it doesnt make any sense to even separate homes by mortgage type period, or by foreclosure, or not foreclosure:

    They’re all friggin homes at the end of the day… valuation analysis should be applied across the board. A home is a home is a home, right?

  12. The Curmudgeon says:

    It’s why appraisals aren’t worth the paper they’re written on. They never include as a comp the house down the street that solk for 100K less at a foreclosure auction than its neighbors generally went for.

    The true value of anything is what a willing, arms-length buyer would pay a willing, arms-length seller.

    Until some determination of realistic value can be reached, the market turmoil will continue. The Hank and Ben show has hardly helped us along in finding true, market-clearing values. If the rules change every five minutes, how could anyone possibly know anything about values anymore?

  13. ReturnFreeRisk says:

    Yes. We should keep the investors (prospective homeowners) in the dark about how much home prices have come down. That will surely build confidence in the market. I am going to start publishing my portfolio returns ex all the losers as well. Superb idea.

  14. ottnott says:

    I don’t see much value, given that the foreclosures, etc., exert an influence on other sales. Why show just part of the influence?

    But the title of your post gave me a name for my idea to reduce the impact of the mortgage crisis. I now call it foreclosure ex foreclosure.

    We know that, in the vast majority of foreclosures unrelated to fraud, everybody loses – the former owner and/or occupant, the mortgage holders, the neighborhood, etc. Even where the owner had no down payment and had been paying interest only, there are financial and nonfinancial costs to being uprooted. In some cases, the owners deal with the anger or distress by causing substantial damage to the home.

    My foreclosures ex foreclosures program would convert qualifying owners into renters paying market rate to stay in the home. They would get a long lease – say 24-36 months – with the usual lease terms pertaining to damage and so on. The occupants would get to stay in the home and would have an affordable (or they wouldn’t qualify), market-based monthly payment. The mortgage holders would be getting a higher-quality income stream. The house would stay off the market for a couple years (less attrition). Nobody would be hit with the big expense that results from a foreclosure. Hopefully, selling conditions would be improved when the lease ended.

    I understand that the contractural arrangements could add a lot of difficulty. At some point, though, we need the financial industry to suck it up and start accepting that we are in a radical situation that calls for radical approaches. Some of the players will have to stop trying to maximize their outcomes on an individual basis and recognize that cooperation en masse produces the best outcome.

  15. dulleshomeguy says:

    Throwing out 50% of sales as they are “duress” or foreclosures helps prop up assessed values.
    Helps gob-m’t rake in more dollas.

  16. R. Timm says:

    There are a lot of good reasons why a foreclosure isn’t comparable apples to apples with a typical transaction. Foreclosures/REO are a different market because they are often sold without warranty / as-is. They are often sold at the courthouse steps sight unseen, hence there is imperfect information making it an inefficient market in comparison to a typical real estate trasaction. Foreclosure sales often come with the unpleasant and expensive task of getting rid of the current tenant through eviction. Foreclosures are often from folks without the means to properly maintain the property and in some cases folks maliciously trash the place.

    In many places foreclosures are the majority of the homes being sold right now. That means non-distressed folks are holding out for higher prices or are underwater and can’t sell. Once foreclosures subside there will be few properties for sale. The pent up demand of buyers on the sidelines over fear of declining prices will emerge and prices will rise. I’ve been following the housing bubble very carefully at thehousingbubbleblog and calculatedrisk since 2004. I predict nationally housing prices will bottom nominally in fall 2009.

  17. eric davis says:

    Wow! BR,

    You aren’t going to call a “Bounce” today?

    the contrarian in me says…..

  18. AGG says:

    How come nobody mentions that foreclosures and access to them is a cash cow for banks and moneyed customers? They charge for the information. It’s a business model. Get it?

  19. zzzzmd says:

    who will buy my house? All this academic business talk…gobblygook!
    put 25% down on a 1 mill home in lower westchester in 1999. As a pretty successfull physician, it was a stretch at 7% 30 year mortgage with taxes of 24k. (refinace to 15 year at 5.5% last crisis)Allegedly my home was worth up to 2.2, now maybe 1.8mill. Who can afford that? taxes are 49k. So even if it is worth an alleged 1.5 mil, with50k taxes, who can afford that at the good ol’ fashion way? ie 20% down, 30yr mortgage at 6.5%?
    The person would need 300k down, and pay 11k per month. He would need to make about a minimum of 500k. With this economy, who is that person, how many are there?

  20. wunsacon says:

    This just in:

    “News ex-bad-news: ~~It’s All Good!~~~”

  21. dig1 says:

    most of you here are traders and wizzes of the Wall street… I wouldn’t know a put from a call and yet, it amazes me still that nobody could have predicted this debacle as early as 2002 or 2003. One thing i have learned through this debacle is that most wall street have no clue the average person that lives with a wife and kids is doing financially because if it were so, what WINSTON MUNN said above would have been obvious to you all. I knew one thing for sure as far as i am concerned back in 2002: and this from an electrical engineer twat that don’t know a single she-aite about trading. When inflation was higher than the increase in house pricing from month to month- something was seriously wrong. I have the scars to prove it because I refused to buy a house that I had had wanted so badly back in 2003 when I saw the price double for no reason. A lot will laugh at this guy called Peter Schiff (which I have come to know just in the past week), but boy, you don’t have to be a scientist like him to have been able to see this tsunami coming. The moral of the story: most wall street including traders have no FN idea how the average man and woman that lives outside of New York state or California is doing financially.

  22. leftback says:

    Lots of nice $750,000 houses for sale suddenly in the Connecticut suburbs, the problem is they are all on sale for between $2-3million, and nobody is taking home boffo bonuses any more… reality is going to be a tough sell in this neck of the woods. These people are going to have to feel the cold wind blow down the back of their necks for a year or so before they come to the table with a realistic price.

  23. Barry,

    You are correct in your belief that foreclosures in the current environment cannot be excluded.

    In a “normal” market, from an underwriter’s perspective, if homes are trading at a “fair market value range” in a given neighborhood, and similar homes for example sell for $485,000 to $505,000, and all of the sudden there is a “comparable sale” at $440,000 — I do not have to take that value into account if it can be shown it was due to a divorce, death of the owner, foreclosure, or anything else that may have caused a party to essentially “blowout of the trade” irregardless of price.

    HOWEVER, when the entire market is being forced down, supply is increasing causing an overhang of inventory, foreclosures are a growing part of the “normal” market, and you do have to consider the values they bring the market down to.

  24. fdoleac says:

    Buyers do not exclude foreclosure and short sale comps in the evaluation of the market. In many cases they are not the best values. Real estate is very, very local and sometimes by street. On the listing side, Realtors must educate the Seller as to the “foreclosure” comp next door and how it effects the pricing strategy. In a Seller’s market, we can’t get deals closed because they would not appraise. Value is always established when a willing and able buyer closes on the property. And, in some markets, foreclosures are the market.