The following analysis comes to us courtesy of Annaly Capital Management:
The past two days have been disappointing ones for housing market followers. Yesterday’s existing home sales showed a much larger than expected drop from the previous month (from 6.54 million in November to 5.45 million in December on a seasonally adjusted annual basis), and today’s S&P/Case-Shiller home price indices came in below estimates. Also reported yesterday, to much less fanfare (it’s not even on the Bloomberg economic release calendar!) was the Federal Reserve’s preferred measure of national home prices: the LoanPerformance National Home Price Indices. The Fed uses this index to calculate the value of real estate assets for the Flow of Funds report released every quarter. Let’s just drop all of these data points onto a graph, shake vigorously, and see what comes out.
Both home price indices have been normalized to 100 in January 2000, and their most recent data points are for November 2009. Existing home sales data is for December 2009.
The first thing to note is the disagreement in November between Case-Shiller and LoanPerformance, the former showing a small rise in home prices and the later showing a small decline. The two indices use similar methodologies, and tend to move together over longer time periods. We won’t hazard a guess as to the reason for this single-period divergence.
The second, and most obvious, feature of the graph is the Cash-For-Clunkers-style heartbeat pattern in existing home sales. The original cut-off for the first-time homebuyer credit was November 30, 2009. Congress approved the extension on November 5, 2009, but most homebuyers who wanted to use the credit made their purchases in September to make sure that they closed before the deadline. Therefore, we can assume that the peak in tax credit-induced buying was November, which as we see briefly spiked back to 2006 buying levels. The dramatic fall in December closings represent sluggish activity in October and November, months in which we stated previously would likely represent levels of “activity that we would call ‘normal’, unmolested by incentives”. It’s clear now that there was nothing organic about the pick-up in sales activity or prices in the back half of 2009. We look forward to seeing how S&P/Case-Shiller and LoanPerformance home price indices respond to this lower level of demand when we receive December data.