FHFA's Lockhart on Home Prices – Everything is Fine

The Federal Housing Finance Agency issued a very up-beat report today on housing prices throughout the United States for January of 09. Their report showed a country-wide increase in home prices of 1.7%. The Biz TV channels broke in over the now daily Geithner/Bernanke hearings to tout the good news. No doubt there will be some 'strong buys' on the homebuilders to follow. Before jumping too deep into the celebration one should look at the FHFA report in its entirety.

FHFA provides a few caveats to their number:

Month-to-month changes in the geographic mix of sales activity explain most of the unexpected rise in prices in January. The January home sales reflected in the FHFA data disproportionately occurred in areas with the strongest markets.

The estimation imprecision associate with the January estimate is relatively large and subsequent revisions to the monthly number could be significant.

There could not be a better time for these 'random variations' in the data to produce a blip in the numbers. This observer does not think that the FHFA is juicing the numbers. They are just using bad data.

Case-Shiller (“CS”) produces a different report on home values. The two reports are not truly comparable as the CS report measure cities and FHFA reports on regions. The two reports somehow mange to reach different conclusions on the status of the housing market in the United States over the past year. For example:

The FHFA reports price drops in the South Atlantic Region at 8.3%. CS reports a drop for Miami of 29% and for Tampa a drop of 22%. Three times as large as FHFA.

The FHFA reports New England down a scant 2.2%. CS on the other hand shows Boston dropped 7% while NY was down 9.2%.

FHFA reported a whopping drop of 21% in the Pacific Area. CS reports Los Angeles -26%, San Fransisco -31% and San Diego -25%. The folks on the West coast of the United States should take issue with the FHFA. The Pacific Region constitutes 40% of the country's real estate after all. A clear flaw in the way FHFA aggregates this data.

FHFA reports the East South Central region as down a modest 1.4%. Tell that to the folks in Atlanta. CS reports a 12% drop there.

Across the entire spectrum of data the FHFA consistently understates the extent of the damage in the real estate market. That is not surprising as they have been soft peddling the problems from the start.

Mr. Lockhart you are the boss of FHFA. This means that FNM and FRE are on your table. These entities went into receivership two months after you said they were "adequately capitalized". You currently have 1.2 mm borrowers 60 days past due. That number has been growing by 75,000 a month. You can only restructure 10,000 loans per month. You have a ten year backlog of loans to restructure. The $200 billion that Congress has allocated you to keep the Agencies afloat is functionally exhausted. This disaster could not have happened with the modest decline in home prices that you have reported. The CS report is much closer to the truth. The losses the Agencies have already suffered and the additional losses embedded in their books is all the evidence you need to know that your report understates the level of the declines.

Mr. Lockhart you somehow survived the transition from Bush to Obama. Given the circumstances at the Agencies during your tenure as the top cop that comes as a surprise. But you made it. With this transition came a promise of openness and candor. The American people desperately need some candor.