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By Michael Pakko, August 27, 2010 3:20 PM

“the expiration of the home-buyer tax credits is the elephant in the room”

Information on residential real estate markets has dominated the news over the past few days.  When it comes to evaluating the housing markets in Arkansas, recent reports from various sources show a consistent picture of recent trends, but the outlook is very uncertain.

Home Sales

The Arkansas Realtors Association (ARA) released statistics this week showing that June home sales were up slightly over the previous year, but down from the previous month.  As shown in Chart 1 below, housing sales follow a recurring seasonal pattern, with the summer months tending to have higher sales than winter months.  July is often the peak sales months of the year, but so far this year, sales peaked in April and have declined since then.

Source: Arkansas Realtors Association

Disentangling the cyclical and seasonal effects is crucial to understanding recent trends.  Chart 2, below, shows seasonally adjusted data that are averaged over calendar quarters to smooth out some of the month-to-month variability (the data are seasonally adjusted using the technique described in a previous article).

Sources: Arkansas Realtors Association, National Association of Realtors

With these refinements, the cyclical pattern of home sales is more evident:  After declining throughout 2007 and 2008, sales steadily increased over the course of 2009.  The first quarter of 2010 saw a sharp decline, followed by a rebound in the second quarter.  Recent data for Arkansas home sales from the National Association of Realtors  (NAR), also displayed in Chart 2, confirm the recent quarterly pattern in the adjusted ARA data.

The sharp decline in the first quarter of 2010 can be partly attributed to weather.  Sales are usually low in the winter months, and this past winter in Arkansas was particularly ill-suited to house shopping.  Sales recovered in the second quarter to about the same pace as in the fourth quarter of 2009.

But when it comes to assessing the outlook for home sales, the expiration of the home-buyer tax credits is the elephant in the room.  Sales in the fourth quarter of 2009 were boosted by last-minute purchases under the original tax credit program for first-time buyers that expired at the end of October.  Weather might have kept activity low in the first quarter, but the impending deadline for taking advantage of the extended and expanded home-buyer tax credit on April 30 was undoubtedly a factor in the second quarter resurgence.

The recent tax-credit deadline required that a contract be in place by the end of April, but the closing date could be later.  As a result, recorded sales in May and June included some transactions that are associated with last-minute contracts to qualify for the credits.  The crucial question is whether the second quarter increase reflects sales that would have taken place later in the year in the absence of the tax-credit deadeline – implying that we should expect a sharp decline over the next few months — or whether it reflects a sustainable improvement in market conditions.

Preliminary information suggests that we will see a drop-off in the third quarter.  New data on existing home sales and new home sales nationwide showed sharp declines in July.  Information on home sales in central Arkansas for July show that Arkansas housing market experienced this downturn as well.  For example, sales in Pulaski county were reported to be down 30.2 percent from the previous month and down 31.5 percent from July 2009.  When the statewide sales figures for July are released by the ARA next month, they are likely to show a sharp downturn.  

Arkansas home sales over the remaining summer months will probably be relatively weak, as the market returns to an equilibrium undistorted by government subsidies.  On the other hand, mortgage rates remain low and house prices have fallen (see below), so the market continues to be favorable for buyers.  This factor should help sustain sales later in the year.

House Prices

In addition to reports from the ARA and NRA, new data on housing prices were released this week by the Federal Housing Finance Authority (FHFA).  Since the housing downturn began in early 2007, the FHFA purchase-only price index has shown a distinctly lower rate of appreciation than the all-transactions index, which includes appraisal data from refinancings.  Ultimately, it is the market sales price that matters, so the purchase-only index provides more accurate information on current market conditions.  However, refinancings are more likely to be prevalent in areas where houses are retaining their value, so the all-transactions index might give a better indication of long-run home values.  [See also, Comment:  Differences Among Home-Price Indices]

As shown in Chart 3, below, the two measures of house prices have diverged considerably since the market downturn began, with   the purchase-only index showing considerably more variability.  Over the past four quarters, the purchase-only index has experienced quarterly ups and downs, but has changed little on net.  The all-transactions index has fallen by 2.4 percent.

Source: Federal Housing Finance Authority

Under either method, house prices in Arkansas have not experienced declines as large as the nationwide average.  Over the past four quarters, for example, the FHFA all-transactions index for the U.S. showed a 5 percent decline compared to the 2.4 percent decline in Arkansas. 

Chart 4, below, compares the two FHFA house price indexes for Arkansas with the average sales-price data from ARA.  The series are normalized to take on a value of 1.0 in the first quarter of 2007, so the data presented in the chart show cumulative price changes since that time.

Sources: Federal Housing Finance Authority, Arkansas Realtors Association, and authors' calculations

 Not surprisingly, the average price data from ARA shows some similarity to the FHFA purchase-only index.  Both measures are based on prices of actual sales.  Both series show a sharp decline in the first quarter of 2010.  This drop is associated with the decline in home sales discussed earlier.  With fewer homes selling in general, the segment of the market including foreclosures and other distressed sales constituted a larger share of total sales, depressing average prices.  With the pickup in market activity in the second quarter, the price spike was also reversed.

Cumulatively, from 2007 through the second quarter of 2010, house prices in Arkansas have decline modestly.  All three measures of home prices show prices down over the period, but by magnitudes of only about 1 to 3 percent.

The FHFA also releases all-transactions indexes for metropolitan areas.  As shown in the table below, these data show that house price changes vary considerably across Arkansas’ metro areas.

Source: Federal Housing Finance Authority

Northwest Arkansas has experienced the largest and most persistent declines in house prices.  Earlier in the decade, the Fayetteville metro area showed the greatest appreciation in the state, so declines more recently serve to offset some of those earlier gains.  Hot Springs has recently shown fairly large declines as well, but compared to five years ago, prices are up about 14.6 percent.  Data for Jonesboro, Texarkana and Little Rock show that house prices increased in the second quarter, with prices also higher than a year ago.  In fact, Jonesboro serves as a counterexample to the experience of Northwest Arkansas:  Rather than rising sharply in the early part of the decade and subsequently declining, house prices in Jonesboro have experienced a relatively slow but steady upward trend.

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By Michael Pakko, February 26, 2010 11:45 AM

Data covering the end of 2009 continue to roll in.  This week, we received new information about home prices from two independent sources. 

First, the  celebrated S&P/Case-Shiller index was released on February 23,  showing that home prices nationwide were up 1.1 percent in the fourth quarter (seasonally adjusted), following a 3.3 percent decline in the third quarter.  Over the past four quarters, the Case-Shiller nationwide index registered a decline of 2.5 percent. 

While the Case-Shiller index is a good measure of home values nationwide and particularly in the nation’s largest metropolitan areas, its component indices contain no specific information about Arkansas.  An alternative is the similarly-constructed set of house price indices produced by the Federal Housing Finance Agency (FHFA).  The latest set of estimates from this source was released yesterday (February 25).  The FHFA’s purchase-only index (comparable Case-Shiller) showed that  house prices nationwide were basically flat in the second half of 2009 (up 0.1 percent in the third quarter and down 0.1 percent in the fourth).  For the year, this measure showed house prices down 1.2 percent.

For Arkansas, the FHFA sales only index showed an increase of 0.5 percent in the fourth quarter, and realtive to a year earlier, house prices were up by 1.5 percent.  As shown in the chart below, this continues a clear pattern: During the period of rapid price appreciation in the first half of the decade, Arkansas home prices grew more slowly than the nationwide average.  Since 2007,  price changes in Arkansas have been similarly muted – we haven’t seen the sharp declines that have been evident in other parts of the country. 

Source: Federal Housing Finance Agency

The FHFA also produces an alternative “all-transactions” index that includes appraisals from refinancings in addition to sales-price data.  By this measure, house prices have recently shown more weakness, with prices down 1.9 percent in Arkansas and down 4.7 percent nationwide (from 2008Q4 to 2009Q4).   Note that Arkansas home prices have remained more stable than those in the rest of the country, using either measure.

Whether the purchase-only or all-transactions index is a better measure of home values in general is an open question.  [See Comment:  Differences Among Home-Price Indices]  But by adding data observations from refinancing appraisals, the FHFA is able to construct indexes for smaller geographic areas, including all of the nations Metropolitan Statistical Areas (MSAs).  The table below shows how  home prices in Arkansas’ MSAs fared during 2009, in comparison to recent years.

Source: Federal Housing Finance Agency

Home prices fell in most of Arkansas MSAs in 2009, but the declines were generally smaller than the U.S. average.  The only exception was in the Northwest Arkansas, where prices have followed a pattern similar to the nationwide average over the past few years.  Home prices were also down sharply in Hot Springs in 2009, but that figure represents the first annual decline after a series of fairly large increases.  Falling house prices in Little Rock and Pine Bluff also represented the first annual declines in the past five years.   Jonesboro and Texarkana both experienced modest house-price increases in 2009, and the data show continued strong appreciation in Fort Smith.

In some metro areas around the country–including many of those included in the Case-Shiller index–home prices have fallen sharply over the past two to three years following a period of exorbitant price increases.  The FHFA data show considerably more stability in Arkansas, with price declines in 2009 representing only a modest departure from the trend of steady appreciation over time.

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By Michael Pakko, February 22, 2010 8:04 PM

As described in a previous article on Arkansas Economist, realtors’ associations provide  two independent measure of Arkansas home sales.  The National Association of Realtors® (NAR) conducts nationwide surveys to estimate total U.S. home sales, and provides quarterly estimates of sales at the state level.  Locally, the Arkansas Realtors® Association (ARA) publishes monthly totals of Homes Sold in Arkansas by Realtors®, which represents a compilation of data from participating multiple listing services around the state. 

Despite their differing methodology and coverage, the two sources of information about the Arkansas real estate market reveal the same pattern:  Sales volumes declined steadily during 2007 and 2008, reaching a low point in the fourth quarter of 2008.  During 2009, however, sales showed steady improvement.

The chart below illustrates these patterns.  It shows both the NAR and ARA measures of home sales  expressed in directly comparable forms — as indexes normalized to equal one in 2007.*  The chart shows that in sales in the fourth quarter of 2008 had fallen by nearly one-third from the average volume of 2007.  After steady increases during 2009 (seasonally adjusted), sales in the fourth quarter of 2009 were back up to well over 80 percent of their 2007 pace.

The outlook for Arkansas’ housing market is generally good.  There may be brief sales downturns associated with the expiration of home-buyer tax incentives later this year and with inevitable increases in mortgage rates as economic expansion picks up pace.  Nevertheless, the steady increase in sales during 2009 suggests that the residential real estate market in Arkansas is well on its way to recovery.  

Sources: National Association of Realtors®, Arkansas Realtors® Association, Moody's Economy.com, Institute for Economic Advancement.

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By Michael Pakko, November 19, 2009 7:58 PM

Even before the onset of the recent recession, residential real estate markets have been at the heart of our national economic tribulations. And having just purchased a home in the Little Rock area, I’ve recently taken a personal interest in the Arkansas housing market. So how did the Arkansas housing market fare during the recession, and is it now recovering?

Data on existing home sales in Arkansas are available from both the National Association of Realtors® (NAR) and the Arkansas Realtors® Association (ARA).

Last week (on November 10), the NAR released its quarterly report on state-level existing home sales. The report showed that the markets are improving in most areas of the country, with 45 states and the District of Columbia showing sales increases in the third quarter relative to the second quarter (seasonally adjusted). Arkansas was one of the states showing an increase, up 2.7%. This was the third consecutive increase for Arkansas home sales, following a 4.2% rise in the second quarter and a 3.6% increase in the first quarter. The magnitudes of the quarterly gains are relatively modest compared to some other states, but Arkansas was one of only 6 states to experience sales increases over all three quarters.

Although these data are indicative of the performance of the Arkansas market relative to other parts of the country, they do not necessarily represent the most accurate assessment of market conditions for the state. According to the the NAR’s own description of its methodology, the monthly survey covers only about 30-40% of all existing home sale transactions. The sample data are used to construct aggregates for the four census regions of the U.S., then the State data are derived from those totals.

Indeed, according to Ethan Nobles of the ARA, it is his understanding that the NAR survey excludes some of the important local markets in Arkansas. The ARA releases its own monthly summary of home sales, consisting of the total number of homes sold by Realtors® across the state. The data are subject to some revision as late reports come in, but they represent (as best as possible) a full accounting of the number of homes sold in the state.

The most recent report from the ARA came out earlier this week (November 16). It shows that home sales were up in September over the previous year. This was the second month in the past three that showed a year-over-year increase. The data, shown in the chart below, suggest that home sales in Arkansas have been on a recovery path throughout 2009.

Source: Arkansas Realtors® Association

However, it is also evident from the chart that there is a pronounced seasonal pattern in the data. Home sales tend to be lower during the winter months, and higher during the spring and summer. This makes it difficult to discern trends over periods less than a year in length. And in particular, it is hard to tell how much of the increase since January 2009 represents actual growth as opposed to regular seasonal movement.

With a longer data series, it would be possible to apply standard statistical techniques directly to the data. In the absense of a long time-series, however, more rudimentary techniques can suffice: The NAR’s monthly report on existing home sales provides estimates of both seasonally-adjusted and not-seasonally-adjusted estimates for the U.S. and the four census regions, over the past 12 months. The ratio of these two sets of estimates provide implicit seasonal factors, as calculated by the NAR (using a census X-11 procedure).

Applying the implicit seasonal factors for the Census South Region to the data for Arkansas from the ARA, we obtain a rough estimate of seasonally-adjusted Arkansas sales. The chart below illustrates the result of this procedure, with the data multiplied by 12 (so they present annualized measures), and averaged over quarters (to smooth out month-to-month variability).

Source: Arkansas Realtors® Association (ARA), National Association of Realtors® (NAR), and the Institute for Economic Advancement (IEA).

It is clear from this chart that home sales in Arkansas were sliding downward before and during the first part of the recession, then dropped sharply in the fourth quarter of 2008. Since then, sales have steadily increased. This confirms the pattern observed in the NAR data suggesting that residential real estate markets in Arkansas have been consistently improving since the beginning of the year.