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Goldman Sachs on National Housing Trends: A Potential Meaningless Epiphany

One of the claims by the National Association of Realtors has been the idea that in the history of recorded (adjusted for inflation) national housing prices (since the 1920’s), they have never fallen year over year. This infers to the novice that house prices do not fall and therefore are a good investment. It is a feel good statement and is true on a technical level. However, its more of a play on statistics since most local housing markets have experienced at least one price drop over the same period. Thats no surprise to most.

The NAR trend is consistent with the OFHEO nominal numbers, although OFHEO is based on a shorter time frame. It has been relied on as the safety net for justifying a home purchases for generations.

Live by the sword,
die by the sword.

In other words, these statistics show a consistent upward pattern which provides a sense of comfort even though most understand that local markets behave differently. An admittedly bad analogy here is the idea that despite the 55 mph speed limit. Some faster than others. Most do not drive 55 but its a safe number to cite.

Jan Hatzius, economist at Goldman Sachs completed a study which forecasts national housing prices to fall in the second half of 2006 or sometime in 2007 [The Chattanoogan] [1] said:

“The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms,” said Jan Hatzius, economist at Goldman Sachs.

Now how do you explain that (assuming the forecast pans out – which I have my doubts)?

The reality here is that the stat is benign to begin with. So this trend, if it occurs, doesn’t signify anything. Yes, it illustrates a downward trend, but it is subject to the changes in the mix of properties thats sold from different regions of the country. It should never have been the basis of an investment decision to begin with.

For example, in a series of Manhattan market reports [2] we can see the overall average sales price drop when all size categories show an increase. How? If there is a surge in smaller unit sales or a drop at the upper end of the market, the overall stats get skewed. In other words, you’ve got to look deeper rather than at the broader numbers at face value.

It will be very interesting to see if the NAR stats correlate with OFHEO’s going forward, especially if OFHEO’s stats show a drop in the near term. Either way, there will be a lot of explaining to do.