For Investors’ Sake, Morgan Stanley Questions Power of Home Price Indices

Morgan Stanley analysts are questioning the power of national home price indices, saying that local ‘shift-in-mix’ impacts may overcome the veracity of such large measurement values. In their latest Housing Markets Insights report, the analysts for the investment bank are asserting that the notion of a national housing market that can be quantified in an index, such as Case-Shiller, RPX – and even Morgan Stanley’s – no longer “reflect what we believe to be the actual changes in home prices,” they say. “While greater macro trends can certainly affect housing across the country, individual markets can deviate substantially from each other,” write researchers Oliver Chang, James Egan and Vishwanath Tirupattur. “We remain convinced that actual home prices may have more to fall, regardless of what the major indices may report.” Furthermore, the different indices capture different aspect of national housing. Case-Shiller includes single-family homes only and excludes condos and new home sales. RPX includes all property types and all sale types. The Morgan Stanley PPSF values include single-family homes only. The analyst provide this chart as an example of the possible disparity: In places such as San Francisco, some declines may be even reported as gains in house prices, they say. According to Case-Shiller, San Francisco is the best performer with a year-on-year gain of 18%. “However, have prices really grown at a near bubble rate since a year ago?” the analysts ask. In fact, they argue that across the board, prices haven’t. Short sales increased in demand, pushing prices up and lower the rate of sale. Real estate owned (REO) properties are flagging in popularity and this is pushing prices up. Therefore, they say a national determination in home prices does not take shift-in-mix trends such as these into account. There are also differences in each type of distressed asset. For instance, the high end of the San Francisco market is outperforming the low end, but not in REO. Also, the largest part of the San Francisco market over the past year has been in the 1,000-2,000 square footage range, representing about 61% of all transactions on average. “For the city that shows the highest YoY gains in the major indices, we find that it is actually showing the beginning of a double-dip with non-distressed prices aggregated across square foot tiers down 1.2% YoY, short sales down 2%, and REO liquidations up 20%,” the report concludes. Write to Jacob Gaffney.