Foreclosures Distort Home-Price Measure | Chappaqua NY Homes

The housing bust obviously depressed the real estate market, but a new study shows that a big jump in distressed sales during the worst of the downturn may have exaggerated swings in at least one key measure of house prices.

Federal Housing Finance Agency

economists William Doerner and Andrew Leventis examined markets in Miami and Tampa, Fla., to gauge the impact of bank-owned property and short sales on the FHFA’s house price index.

The findings, released in a new paper: distressed sales dragged the index down as housing bottomed out and now are boosting numbers a bit.

“The presence of distressed sales in the standard HPI had a depressing effect on measured price changes. In more recent periods, when distressed sales comprised a shrinking percentage of real estate transactions, the Working Paper reveals the opposite effect. As the ‘weight’ of distressed sales on the standard index decreased in recent periods, the depressing effect lessened over time. This meant that the price appreciation observed in the standard FHFA index was somewhat above what the distress-free measures reported.”

The FHFA’s index is one of several measures that the industry and economists use to gauge the health of the real estate market. The latest data, released July 23, showed that house prices appreciated a seasonally adjusted 0.7% in May from the prior month — the 16th consecutive increase. The report reinforced views that the housing market is rebounding.

The study by Messrs. Doerner and Leventis doesn’t change that. But it does point to some distortion in the index through boom-and-bust cycles.

In the late 1990s, for example, distressed sales in the Miami and Tampa markets tended to price about 10%-15% less than normal sales. As the housing boom accelerated, the discount shrank to 5% and 10%. But from 2007 to 2010, that figure jumped to near 30%.

“In recent quarters, with the onset of the recovery and rising home prices, such discounts have become slightly more modest. In the first quarter of 2013, for instance, the average discount was about 25%,” the authors write.

The paper cautions that the results for Miami and Tampa might not be duplicated in areas that experienced a less dramatic crash or saw fewer distressed sales.