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January 8th, 2009

Report: Different Take on Home Prices



One of the major hurdles that has (so far) stymied a turnaround in the housing market has been falling home prices. Yet, one report documents something partially to the contrary.

The 2008-09 Remodeling Cost vs. Value Report says, “instances of steep home-value depreciation occurring in some parts of the country, particularly those with widespread foreclosures, have led to conclusions about the weakening of the overall existing home market that, while certainly not unfounded, could be exaggerated.” [emphasis added]

The report found that the “average cost-value ratio across all projects” dropped 8.02% in 2007, while declining by only 3.86% in 2008. “Even with a mild (2.67%) increase in 2007 construction costs, it seems likely that if house values were plummeting as far and as fast as media reports would have us believe, the Cost vs. Value results [in 2008] should have been much worse.” [emphasis added]

The National Bureau of Economic Research (NBER) concurs. “Even under extremely pessimistic scenarios for foreclosure shocks, average U.S. house prices, as measured by the comprehensive OFHEO house price index (which we argue is the most reliable and useful measure of house prices to use for our purposes), likely would decline only slightly or remain essentially flat in response to foreclosures like those predicted for the 2008-2009 period. This suggests that home prices are quite sticky, and that fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”

Unlike many media sources, the cost-value report doesn’t base their home price values on the popular Case-Schiller Index, which they claim “omits 13 states and has incomplete coverage of 29 states.”

Maybe there’s something to this after all?

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2 Responses to “Report: Different Take on Home Prices”

  1. Bill Berliner Says: January 8th, 2009 at 3:58 pm

    Interesting thought…It seems like home prices in some areas (e.g., California) have dropped enough to generate renewed activity, even if a lot of the sales are related to foreclosures. Also real estate is highly localized. Where I live in California, prices have held up, but other areas of CA have been obliterated.

  2. Tim Manni Says: January 8th, 2009 at 4:55 pm


    Thanks for reading and sharing some comments. Yeah, this particular report presents a different side to a story you hear about often. Your situation coincides directly with the main point of the cost-value report. The market in your area has remained relatively “normal,” yet many localized markets have been “obliterated,” possibly exaggerating California’s overall condition.

    I think another interesting point they present to back up their claims is that they use a different index (OFHEO’s) to measure home values instead of S&P/Case-Schiller’s, which some have remarked as spotty.

    Thanks again for your input,


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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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