The Not-So-Hidden Truth About Home Prices

David Leonhardt gives the business to a topic we have covered several times here: What is really going on with residential real estate prices?

"Based on the official housing statistics, you might have guessed that the sellers would have made out just fine, despite all the talk of a real estate slump. According to one widely followed real estate index — tabulated by the government agency that regulates Fannie Mae and Freddie Mac — the average house in Naples sold for 20 percent more this summer than it would have a year earlier.

But that wasn’t what happened at the auction. In fact, if you were at the beach club that Saturday, you could have been excused for thinking that the real estate market was crashing.

One three-bedroom ranch house with a pool sold for $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, sold for $880,000 at the auction., compared with $1.35 million a year earlier. On average, the houses that changed hands at the auction had fallen about 25 percent in value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the auction’s results.

Now, Naples is not a typical housing market. House prices nearly tripled in the first half of this decade, and speculators, who are more likely than residents to sell a house in a panic, flooded into the area in recent years. But with that said, Naples is not as unusual as you may think."

You may recall we looked at this auction, and its results, in a few linkfests in October.

The details of these ongoing pricing drops — and the misleading NAR reporting about it — are quite similar to our wn experiences. Our anecdotal story about that nice property in NY was rather similar. And as the Times column makes clear, its not just Naples:

"The truth is that the official numbers on house prices — the last refuge of soothing information about the real estate market on the coasts — are deeply misleading. Depending on which set you look at, you’ll see that prices have either continued to rise, albeit modestly, or have fallen slightly over the last year. But the statistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.

In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. The auction in Naples may have exaggerated the downturn in the market there, but not by much. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall."

In the sidebar, Leonhardt explains how the OFHEO housing stats paint a very false picture:

"Right now, all these [OFHEO] flaws seem to be making house values look much stronger than they really are. According to the latest index, for example, the average house in Miami would have sold for 22 percent more this summer than a year earlier. You won’t find many house sellers in Miami who would agree that’s true.

As Thomas Lawler, a housing economist (and no relation to Patrick Lawler), recently wrote in a report to clients, "Well, there’s a growing view that this index…doesn’t reflect what’s really going on with home prices." (emphaisis added)

The one saving grace of Residential Real Estate these days has been plummeting yields — the 10 Year has dropped from 5.25 down to 4.4% over the past 6 months. That has provided some cushion for non specualtive sale price across the country.   

The bottom line is that Housing Prices have already fallen dramatically, and are could still have more room to the downside — especially if the economy slows even further.

The Hidden Truth About Home Prices
David Leonhardt
NYTimes,  December 6, 2006

More on Housing Prices
David Leonhardt
NYTimes,  December 5, 2006

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Subprime Loans Going From Boon to Housing Bane

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