Home Value Distortions

Here are some numbers for Phoenix residential real estate sales in January. The picture they paint won’t surprise you but the way the numbers come together is interesting and contains a cautionary tale.

First, look at Maricopa County as a whole. Foreclosures were up 8.3% increasing from 3,110 in December to 3,370 in January. January sales were up 49% over January 2008 but down 17% from December 2008. The median sales price was $136,000 a 44% drop from the median sales price of $243,000 in January 2008 and down 7% from December 2008.

Now before we drill down a little bit, note that comparing any monthly sales figures to the sales figures of the first six months of 2007 is probably going to show some impressive gains. Don’t get excited. Sales virtually collapsed in the early months of last year. It’s such a low base year that even sub par sales this year are going to look spectacular on a comparative basis.

Why do the median income figures indicate a bigger drop year-over-year than you see in the Case-Shiller reports for Maricopa County? The answer is that the data is badly skewed by sales in Phoenix. Almost a third of the sales for the month, 1,190 out of a total of 3,590, were in Phoenix. The median price of a home sold in January in Phoenix was $74,500 versus a median price of $210,000 in January 2008 and a median price of $90,000 in December 2008.

Did the median price really drop 65% from last year and 17% in one month? No, of course not. What did happen is that the upper and upper middle ends of the marketare moribund and the banks were heavily liquidating REO over the past several months. Due to time lags, a house that sells at an auction in late November or December actually closes in January. The median sales price gets dragged down by the composition of the sales and the period to period comparisons are suspect at best since the data that underlies the numbers pulls from a different set of circumstances. In this case, January 2008 sales were comprised of far fewer distressed sales as well as a median price that was derived from a broader mix of home sale prices.

If you want to take it a step further, you would need to go even deeper into the Phoenix market, probably block by block to really figure out what is going on. The foreclosure sales tend to be clustered, hence median prices and price declines vary wildly from one part of the city to the other.

None of this is meant to argue that the situation isn’t ugly. It is and I wouldn’t advance any other argument. It does show how misleading the raw numbers can be and in this particular case overstate the severity of the problem. And here is the cautionary tale.

Numbers like these are going to be used to create a foreclosure mitigation program. We know it’s supposed to be announced Wednesday and will probably also empower the bankruptcy courts to modify residential mortgages. Part of the program will no doubt include modification of mortgage balances presumably to levels commensurate with existing values. As I hope I have demonstrated, figuring out what that value may be is tricky at best. Macro numbers can lead you astray very quickly.

Unless the new programs provide for a rigorous process to determine market value, it is possible for them to do harm while trying to do good. Misinterpreting value has the potential to establish prices lower than current market. You can see how easy it would be to do.

Unfortunately the need to modify quickly combined with the likely volume of applicants is going to probably preclude an organized assessment of value.

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