house prices and fundamentals under the micrscope

8/14/2019 House Prices and Fundamentals Under the Micrscope

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House Prices and Fundamentals

Under the Microscope

Steve Oliner*

American Enterprise Institute and UCLA Ziman Center

Presented at Meeting of Collateral Risk Network

Washington, DCOctober 30, 2013

*This presentation describes work done jointly with Ed Pinto at AEI and Morris Davisat the University of Wisconsin.

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Part 1:

Setting the Stage

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House Prices: What Do We Know?

Housing busts can be very damaging to the economy and

financial system. Best to prevent them if possible.

House prices can stray from fundamentals (construction cost,

rent, income). Eventually correct back.

Risk varies over the cycle. Increases during the boom.

Land is the risky part of the housing bundle.

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Residential Land and House Prices

In recent cycle, land prices moved up and down much more than house prices.

Source: Nichols, Oliner, and Mulhall (2013).

0

50

100

150

200

250

300

0

50

100

150

200

250

300

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Residential land price index, 23 cities

Case-Shiller 20-city

house price index

Index, 2002:H2 = 100

Half-yearly

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Open Questions

How do land and house prices move within a metro area? Is

there a common spatial pattern across cities?

How does risk correlate with the size of the gap betweenhouse prices and fundamentals? Are there threshold effects?

What are the most effective ways for regulators to lean against

house price booms? Can simple rules work?

Micro data are important for addressing all of these

questions.

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This Study

Uses property-level data to pop the hood on housing valuation

within metro areas.

Focus on detached single-family homes.

Initial analysis for Montgomery County, MD.

Borders Washington DC.

Large, diverse county. About 1 million residents.

In the process of extending the analysis to 25 other counties in

10 metro areas.

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Part 2:

Data and Methodology

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Key Data Sources for Montgomery County

Property-level data

House characteristics, location, and AVM value: FNC, Inc.

Reconstruction cost as new: Marshall & Swift/Boeckh (MSB)

Zip-level data

House price indexes: FNC and Zillow

Construction cost indexes: MSB

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Creating Time Series

Roll the property-level AVMs back from 2013:Q3 to 2000:Q1

using FNC zip-level house price indexes.

Roll the property-level adjusted reconstruction cost back from

2013:Q3 to 2000:Q1 using MSB zip-level cost indexes.

For Montgomery County, almost all zips have same cost index

Back out implied land value for each property in each quarter.

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Part 3:

Results

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20837

20854

20874

20878

20871

20882, 21797

20838, 20839, 20841, 20842

20850

20904

20855

20906

20876

20872, 21771

20832

20853

20852

20902

20817, 20818

20868, 20905

20879

20815

20901

20814

20886

20910

20707, 20866

20903

20877, 20880

20912

20851

20777, 20833, 20860,

20861, 20862

20812,

20816

20895,

20896

20879

20879

20903

Percent

Less than 10*

10-20

20-30

30-40

More than 40

House Price Decline in Montgomery County, 2006-2012

Wide variation across zips. Smallest declines inclose-in areas, largest declines in outlying areas.

* Includes zip 20815, where index rose 7 percent.Source: Authors' calculations using data from FNC, Inc. 12


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House Prices in 20815 and 20903

Very different cycles in two zip codes less than 10 miles apart.

Source: FNC, Inc.

60

100

140

180

220

260

300

60

100

140

180

220

260

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

20815 -- Chevy Chase

20903 -- Silver Spring

Annual average

Index, year 2000=100

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20837

20854

20874

20878

20871

20882, 21797

20838, 20839, 20841, 20842

20850

20904

20855

20906

20876

20872, 21771

20832

20853

20852

20902

20817, 20818

20868, 20905

20879

20815

20901

20814

20886

20910

20707, 20866

20903

20877, 20880

20912

20851

20777, 20833, 20860,

20861, 20862

20812,20816

20895,20896

20879

20879

20903

Dollar per square foot

Less than 15

15-25

25-40

40-70

More than 70

Average Land Price in Montgomery County, 2013:Q3

Highest in close-in zips, with downwardgradient moving away from DC.

Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

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20837

20854

20874

20878

20871

20882, 21797

20838, 20839, 20841, 20842

20850

20904

20855

20906

20876

20872, 21771

20832

20853

20852

20902

20817, 20818

20868, 20905

20879

20815

20901

20814

20886

20910

20707, 20866

20903

20877, 20880

20912

20851

20777, 20833, 20860,

20861, 20862

20812,

20816

20895,20896

20879

20879

20903

Square feet

Less than 11,000

11,000-15,000

15,000-25,000

25,000-40,000

More than 40,000

Average Lot Size in Montgomery County, 2013:Q3

Largest in outlying zips, dropping toless than 1/4 acre in close-in zips.


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20837

20854

20874

20878

20871

20882, 21797

20838, 20839, 20841, 20842

20850

20904

20855

20906

20876

20872, 21771

20832

20853

20852

20902

20817, 20818

20868, 20905

20879

20815

20901

20814

20886

20910

20707, 20866

20903

20877, 20880

20912

20851

20777, 20833, 20860,

20861, 20862

20812,

20816

20895,

20896

20879

20879

20903

Dollars

Less than 200,000

200,000-250,000

250,000-400,000

400,000-600,000

More than 600,000

Average Lot Value in Montgomery County, 2013:Q3

By far the highest in close-in zipseven though the lots are small.


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20837

20854

20874

20878

20871

20882, 21797

20838, 20839, 20841, 20842

20850

20904

20855

20906

20876

20872, 21771

20832

20853

20852

20902

20817, 20818

20868, 20905

20879

20815

20901

20814

20886

20910

20707, 20866

20903

20877, 20880

20912

20851

20777, 20833, 20860,

20861, 20862

20812,

20816

20895,

20896

20879

20879

20903

Percent

Less than 35

35-45

45-55

55-65

More than 65

Average Land Share of Property Value in Montgomery County, 2013:Q3

Excceds 65% in some close-in zips, droppingto less than 35% in some outlying zips.


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Land Prices over Time

For zips grouped by land price in 2013:Q3. Very large swing for low-price zips,much less for high-price zips.

0

20

40

60

80

100

120

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

More than $70/sf

$15-$25/sf

$25-$40/sf

$40-$70/sf

Less than $15/sf

Index, 2006=100

Note: Observations for 2013 represent average of Q1, Q2, and Q3.Source: Authors calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

Annual

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Prices and Construction Costs: 2000-2006

Land prices rose more than house prices everywhere, especially in zips with lowland prices. Construction costs accounted for little of the rise in house prices.

Source: Authors calculations based on data from FNC, Inc. and Marshall & Swift/Boeckh.

0

100

200

300

400

500

600

Less than $15/sf $15-$25/sf $25-$40/sf $40-$70/sf More than $70/sf

Zips grouped by land price in 2013:Q3

Land Price House price Construction cost

Percent change

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Prices and Construction Costs: 2006-2012

Land prices fell more than house prices everywhere, especially in zips with lowland prices. Construction costs continued to rise.

Source: Authors calculations based on data from FNC, Inc. and Marshall & Swift/Boeckh.

-70

-60

-50

-40

-30

-20

-10

0

10

20Less than $15/sf $15-$25/sf $25-$40/sf $40-$70/sf More than $70/sf

Zips grouped by land price in 2013:Q3

Land Price House price Construction cost

Percent change

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Land Shares over Time

For zips grouped by land price in 2013:Q3. Huge swing in land share for low-price zips, while share is much more stable for high-price zips.

Note: Observations for 2013 represent average of Q1, Q2, and Q3.Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

More than $70/sf

$15-$25/sf

$25-$40/sf

$40-$70/sf

Less than $15/sf

Annual

Percent

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2000-12 Cycle: House Prices Fell More in Zips

with Previous Large Rise in Land Share


-50

-40

-30

-20

-10

0

10

10 15 20 25 30 35 40 45 50

Hous

e

price

change,

2006

to

2012,p

ercent

Maximum rise in land share from 2000 to any year through 2006, percentage points

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with Previous Large Rise in Price-Rent Ratio

-50

-40

-30

-20

-10

0

10

60 70 80 90 100 110 120 130 140

Hou

se

price

change,

2006

to

201

2,percent

Maximum rise in price-rent ratio from 2000 to any year through 2006, index points

Source: Authors' calculations using data from FNC, Inc., Marshall & Swift/Boeckh, and REIS.

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with Previous Large Rise in Price-Income Ratio

-50

-40

-30

-20

-10

0

10

40 60 80 100 120 140 160

House

price

change,

2006

to

20

12,percent

Maximum rise in price-income ratio from 2000 to any year through 2006, index points

Source: Authors' calculations using data from FNC, Inc., Marshall & Swift/Boeckh, and ScoreLogix.

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Metro Areas in Full Study

MSAs represent range of markets across the U.S.

Counties selected to capture range of experience within the

MSA. 26 counties in all.

Total population of selected counties: about 40 million

East Coast Far West Interior

Boston Seattle Chicago

Washington DC Los Angeles Detroit

Miami Phoenix Memphis

Oklahoma City

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Summary

Housing submarkets are important in Montgomery County.

House price swing was largest in outlying areas; it was muchsmaller in affluent, close-in areas.

Land prices were more volatile than house prices, especiallyin the outlying areas.

Rapidly rising land share was associated with sharp houseprice correction later on.

Results suggest that clearest signal about over-valuationcould come from developments in the outlying areas.

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house prices and fundamentals under the micrscope

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