The great reflation trade of 2008 – 2010 and the Federal Reserve monetizing national debt — buying U.S. Treasury Bonds via POMO — has failed to prop up the real estate market from it’s ghastly inorganic highs.

The estimates on how far national home prices can fall vary, but the real estate bubble reverting to the historical trendline is a reasonable assumption.

The tragedy here, at least from a news prospective, is that many people are putting a inordinate amount of faith in the Case Shiller numbers, even though the Case Shiller index is lagging indicator with several flaws.

As Reggie Middleton has been discussing for quite some time, the Case Shiller index is a flawed indicator because it omits several key variables: bank owned real estate, REI flips, condos, and several other segments of the real estate market. Notably, these specific areas of the real estate market are among the worst hit, which if plugged into a modified Case Shiller model, would likely paint a more gloomy picture of the drop in housing prices than we currently have.

Moreover, to illustrate just how lagging of an indicator the Case Shiller model really is, consider this bit of chartology:

As the chart poignantly illustrates, it takes roughly one year after housing sales numbers begin to fall to see lower Case Shiller values.

When you consider that it took roughly one year after the peak in housing sales for Case Shiller values to begin their decline, it’s not unreasonable to suggest that a 2nd decline in Case Shiller will commence after the peak from late 2009/early 2010.  As the first chart from above clearly shows, the data suggests that any recovery originating from government induced steroids stimulus has failed and we’re finally entering the beginning of the double dip.

Guess this means mainstream media will finally have to catch up and report what many real estate diehards already knew – lower sales means home prices are going lower.

Image Sources

The Economist
Double Dip

Boom Bust Blog
Reggie Middleton
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