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The Importance of Accurate & Integrated Measures of Property

PricesJ. Steven Landefeld, Director

February 23rd, 201041st Session of the UN Statistical Commission

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Importance of Property Prices

▪ Housing and other asset bubbles significant part of U.S. macro story. Rising housing prices and their affect on net

worth, debt accumulation, consumer spending and saving.

Rising housing prices and their affect on residential investment

Effects of falling prices: Reductions in consumer spending and investment in

residential structures

Increased saving and rebuilding of balance sheets

Multiplier affects

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-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Pe

rce

nt

Revaluations as a % of total household real estate assets

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Importance of Property Prices

▪An IMF study of housing price booms and busts in 14 industrial countries, 1970-2001 (Helbling, 2005) found that: “Housing price busts coincided with sharp

slowdowns in economic activity, and in all but one case, with outright recessions.”

“Downturns in economic activity tend to be more severe in the case of boom-bust cycles.”

▪For international housing price trends, see www.economist.com/houseprices

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Savings & Wealth

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

60000

65000

80Q1

81Q1

82Q1

83Q1

84Q1

85Q1

86Q1

87Q1

88Q1

89Q1

90Q1

91Q1

92Q1

93Q1

94Q1

95Q1

96Q1

97Q1

98Q1

99Q1

00Q1

01Q1

02Q1

03Q1

04Q1

05Q1

06Q1

07Q1

08Q1

Bill

ion

s o

f d

olla

rs

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Ind

ex, 8

0Q1:

1.00

Net worth Personal savings rate Net worth as % of DPI

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Personal Income & Housing

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

rati

o

Value of household real estate assets/Personal income Household total liabilities/Personal income

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Home price indices (percent chg)

-20

-15

-10

-5

0

5

10

15

20

Dec-0

1

Jun-02

Dec-0

2

Jun-03

Dec-0

3

Jun-04

Dec-0

4

Jun-05

Dec-0

5

Jun-06

Dec-0

6

Jun-07

Dec-0

7

Jun-08

Dec-0

8

Jun-09

Yea

r o

ver

year

% c

han

ge

Case-Shiller (20 city composite) FHFA HPI Zillow Home Value Index

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Contributions to Percent Change in Real GDP

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PCE 3.44 1.85 1.85 1.97 2.42 2.34 2.01 1.84 -0.17 -0.40

Investment 1.19 -1.24 -0.22 0.55 1.55 0.92 0.46 -0.65 -1.18 -3.49

Residental 0.05 0.03 0.24 0.40 0.52 0.36 -0.45 -1.05 -1.00 -0.65

Government 0.36 0.67 0.84 0.42 0.26 0.06 0.26 0.32 0.59 0.38

Net Exports -0.85 -0.20 -0.65 -0.45 -0.66 -0.27 -0.05 0.63 1.20 1.08

Personal Saving Rt. 2.90 2.70 3.50 3.50 3.40 1.40 2.40 1.70 2.70 4.60

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What Prices?

▪ Asset Prices Stock: Variety of housing prices from sales,

assessments, and survey data

Investment flow for structures: Replacement cost using mix of hedonic and other measures

▪ Rental Price: Gross rent: Rental and benchmark housing survey

data

Maintenance and other costs: Variety of data

Net rent: residual

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Why It’s Important to Get It Right

▪ Asset prices affect consumer confidence, saving, consumer spending, and availability of credit.

▪ Rental prices affect inflation and COLA’s, equity prices, bond prices and interest rates, exchange rates, Fed policy, and real output and employment.

▪ Investment prices affect industry and national real GDP and productivity, inflation, Fed Policy, and real output and employment.

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Home price indices[Dec 2000 = 1.0]

0.9

1.1

1.3

1.5

1.7

1.9

Dec-00

Jun-0

1

Dec-01

Jun-0

2

Dec-02

Jun-0

3

Dec-03

Jun-0

4

Dec-04

Jun-0

5

Dec-05

Jun-0

6

Dec-06

Jun-0

7

Dec-07

Jun-0

8

Dec-08

Jun-0

9

Case-Shiller (20 city composite) FHFA HPI Zillow Home Value Index

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Use of Moving Averages ?

100

120

140

160

180

200

220

240

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Ind

ex

FHFA HPI FHFA HPI, 3 year average

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Potential Problems

▪Use of marginal prices in valuing stocks Markets can be very thin and volatile Market transactions in the downturn may

be overly weighted to distress sales and sales from distressed areas

Example from the United States

▪ Important issue in relation to the discussion of marking assets to market

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Potential Problems

▪Owner’s equivalent rent (OER): Adequacy of respondent estimates of

rental values Adequacy of rents from rental units as a

proxy for implicit owner occupied housing rents

Ambiguity of relationship between user cost and OER estimates

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Conclusions

▪ Importance of accurate, timely, and relevant data on property prices call for: Indicators of sustainability in trends in property

prices Property price to personal and business income ratios.

detailed leverage ratios, bank exposure, debt service, and integrated financial and real accounts.

More complete data on housing transactions, including characteristics and prices. New hedonic indexes for commercial and residential asset

prices Use of a moving averages?

More accurate data on owners equivalent rent (OER): More complete and timely benchmark data on rental values

and characteristics Mix of user cost and OER methods?