Tuesday, August 25, 2009

Case-Shiller: June '09 Data, Housing Price Forecast Shifting Up

Posted by CavemanForecaster at 9:36 AM
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The June '09 Case Shiller Housing Index data was released this morning. The positive trend we have been seeing the last couple of months continues. Some quick highlights:


  • The non-seasonally adjusted 10 city composite was up 1.4% over last month (April).
  • The year over year change for June was down 15%.
  • All but 2 of the 20 cities tracked showed month over month gains. Detroit and Las Vegas were still down slightly in June.
The more interesting development is how the 10-city index and my ARIMA forecast model has evolved over the past few months. Although the month to month change has been subtle, the resulting ARIMA forecast for the next 18 months has changed significantly. Here is the updated 10-city composite and 18 month forecast:


What is most notable is the change in the April/May forecast for next year. It is now forecast to be about even with the lows from earlier this year. Of course take note of the confidence intervals plotted which show a wide range of possibilities going forward. But the thing that is interesting is how this forecast has evolved over the past few months. Here is the ARIMA forecast from 3 months ago:


Notice how different the forecast was in April compared to now. The forecasted low for next April/May has shifted up considerably.

So What is a Reasonable Expectation for Housing Prices?

I believe that the shift in the ARIMA model forecast in the bullish direction over the past few months is showing some real shift in the housing market. It is too early to tell at this point what that will really mean for next year or to even say whether we have seen the lows of this housing decline. There still is a lot of uncertainty as evident in the confidence intervals plotted. In fact, the latest ARIMA forecast (the first plot above) showing the lows for next April/May being nearly even with this years lows suggests that we are at a point where there is nearly an even 50/50 chance that we have seen the lows of this housing price decline. So flip a coin and take your bet!

We really won't know for sure until we get past the next 2 or 3 months and we re-enter the downside seasonal effect of the year. Only once we see how far and fast prices decline in the fall will we really be able to forecast where the lows will likely be for next year and whether or not we have seen the lows or not.
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2 comments:

  1. I still worry about the effects of recent government distortions on this series.

    I mentioned the Freddie and Fannie foreclosure moratorium previously, and Calculated Risk had a few bullet points on the unsustainable impact of new home buyers on existing home sales.

    Separately, he looks at the fundamentals which suggest that prices are still too high. Personally, when I look at those graphs and see unusual angles at the end of the series, I grow a bit suspicious, just because the rest of the series are relatively smooth. With the exception of the peak of the bubble, most other sharp angles tend to be temporary anomolies in the middle of much smoother trends. One possible explanation for the recent sharp uptick is the temporary distortions in the marketplace.

    And Mish covered the fall in cure rates, which will lead to an upcoming wave of foreclosures.

    Anyway, it'll be interesting to see how the model fares in the coming months.
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  2. Dave,

    Great points and I totally agree. In my own head I always keep in mind that these types of models are totally "ignorant" to the market fundamentals and any artificial distortions at play but I don't always mention that predominantly in my posts.

    I am suspicious any time a sharp inflection is forecasted like this. Sometimes you will see a one or two point anomoly where the forecast shifts but then lines back up where it was and in those cases I would discount it as bad or temporary artificial "distortions" in the free market as you mention. But here, the shift seems to be slow and consistent... so far. And I do have some confidence in that I have seen this type of ARIMA model successfuly forecast an inflection like this many months out as this specific ARIMA model did forecast the top of the housing market back in 2005/2006.

    But the real test will be later in the year as we get back to the negative seasonal time period. If the forecast for a recovery holds up then I will be much more confident in this forecast.
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