How Can Home Prices Rise and Fall at the Same Time?

What is with all the conflicting reports on housing prices and the direction of the market, syndicated columnist Kenneth Harney asks in the Baltimore Sun. At the end of the day, what’s really going on out there?

If, as the National Association of Realtors reported last month, the median price of an existing home nationwide fell by 3.1 percent in 2006, does that mean that your house lost value as well?

Or do you focus instead on the more upbeat numbers released last Friday by the federal agency that tracks value shifts in America’s largest database of existing dwellings?

The Office of Federal Housing Enterprise Oversight (OFHEO) reported that home values rose by an average 5.9 percent last year, although the rate slowed to just 1.1 percent in the final three months of 2006.

It also found some quarterly deflation in prices in California, parts of Florida, the Midwest and New England, where sales have tumbled in the past year despite home loan rates remaining near record lows.

How could two highly respected gauges of real estate prices and values come up with contradictory conclusions? How can a government report present nearly 6 percent average appreciation on existing homes at the same time the most comprehensive private-sector study of actual selling prices says they’re down 3 percent?

Could they both be right?

The surprising answer is yes - because they are measuring different things. For example, the median price surveys from the National Association of Realtors have an important limitation. The median price is influenced by changes in the geographic composition of where houses are selling.

If high-cost markets experience record home sales - as occurred in California and the Mid-Atlantic states during the boom - while low-cost markets are relatively quiet, the median will be pushed upward.

But if sales are down sharply in high-cost markets - California sales are down by about 30 percent for the year - while Texas mortgage demand rises and sales in lower-priced areas in general are through the roof, that will up the number of lower-cost sales in the mix, and drag the median price down.

So what we’re seeing is that a reported 3.1 percent decline - or a 3.1 percent increase, for that matter - may not be exactly what it appears to be.

Now take the OFHEO survey. Its database, large and impressive as it is, omits much of the country’s highest-cost housing - dwellings with jumbo mortgages.

In other words, higher than the Fannie Mae-Freddie Mac limit; currently $417,000. That’s a very important omission, because higher-priced homes often experience more volatile swings in values.

There are also a lot of such loans in certain parts of the country. Getting a California mortgage for less than that amount is infrequent in a state with median prices pushing half a million.

The OFHEO numbers also omit the condo market - a key segment in Florida and many large urban markets. Leaving out condos in areas where overbuilding and investor panic have depressed values significantly, documented by local realty statistics, inevitably produces rosier conclusions than reality.

So OFHEO’s report that Miami area home prices were up by a stunning 15.3 percent last year should be taken with a giant grain of salt. A big grain of salt.

Still another problem: OFHEO’s data include mortgage refinancing, which frequently yields higher appraised values than purchases.

Despite these limitations, you can look at both surveys and come away with some useful conclusions about the outlook for home mortgage demand:

• If you own or are buying property in any of the dozens of metropolitan areas that boomed during 2002-2005, you can be fairly certain that property values are either giving back some of those fat gains or are flat for the time being.

• If you live or are buying in an area where job growth is strong and you did not see the hyper-inflation of the recent boom years, you’re probably are seeing excellent growth in home values.

• The truly sobering pictures are in the industrial Midwest and portions of New England, where job and population growth has been flat or negative. The number of home mortgage applications isn’t going to pick up until the job market gets out of negative territory and people start moving in.

SOURCE: Baltimore Sun