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You can’t
pick up a newspaper today without reading about the boom in single family home
prices. It is, therefore, timely that Zephyr should add a home price data base
to the ever growing list of over 12,000 indexes found in StyleADVISOR. This database
includes home price quarterly returns for fifty states, ten regions and 379 cities
starting in 1975. These returns are computed by the Office of Federal Housing Enterprise
Oversight (OFHEO). Our interest in home prices was prompted by the announcement
that the Chicago Mercantile Exchange will begin trading derivatives on home prices
in selected cities. These instruments will allow home owners to hedge their real
estate exposure. Even those who have no interest in these new securities (to be
issued sometime in 2005) should find the home indexes a useful addition to StyleADVISOR.
There are a number
of ways that the home price data can be displayed in StyleADVISOR. Figure 1 plots
the home price index for Fort Lauderdale (this index also includes Pompano and
Deerfield Beach) in our Performance graph along with the aggregate home price
index for the entire United States. This is the growth of $100 starting December
1, 1975. The red shaded area at the bottom of the graph measures the cumulative
difference between Fort Lauderdale home prices and the rest of the country. The
fact that the cumulative difference was negative for all this period means that
home prices in Fort Lauderdale lagged the country. Figure 2 shows this relationship
broken up into shorter time periods. Here we see the rolling five year difference
between Fort Lauderdale (blue line) and the US (black line). For a short time
in the early 1980’s Fort Lauderdale prices outperformed the US but for the
rest of the 80’s and all of the 90’s prices lagged most of the rest
of the country. Since 2001 there has been a sharp increase in Fort Lauderdale
prices relative to the US. In the five year period ending December 2004, Fort
Lauderdale outperformed the US by 6.29% annually. Many believe that this recent
relative strength in Florida real estate is due to the growing retirement of the
baby boomers. This could certainly be a factor, but it doesn’t explain the
same phenomenon occurring in places like Bakersfield, Baltimore, Providence RI
and many other non-retirement cities.
Figure 1:
Figure 2:
Another way to
compare Fort Lauderdale and US home prices is to look at the calendar year returns,
as seen in Figure 3. It is interesting to note that the single best calendar year
for Fort Lauderdale was 1980 when home prices increased by 19.02%. The best calendar
year for overall US prices was 1978 with home prices appreciating by 13.32%.
Figure 3:
Figure 4 looks
at rolling four quarter (one year) rates of return. We think this graph does the
best job of putting the recent strength in real estate prices into a longer term
perspective. Here we can see that the worst one year return for Fort Lauderdale
was the one year ending September 30, 1984 with home prices down 3.37%. The strongest
one year period is the one ending September 30, 2004 with prices up 23.89%. Even
if we are reluctant to call the recent price appreciation a bubble, we have to
admit that the last few years have not been typical. After a similar price spike
up in 1980, year-to-year home prices in South Florida (as in the US as a whole)
were quite modest. The annual compound growth rate for Fort Lauderdale home prices
for the seventeen years ending December 1999 was 2.37% and for the US was 4.26%.
Figure 4:
Figure 5 shows
four tables that we prepared using the search function in StyleADVISOR that show
the best and worst housing markets for the last five and three year periods.
Figure 5:
Using the four
graphs (Figures 1-4) we have discussed, we have created two new workbooks that
can be downloaded from our website in the Workbooks
section (non-Zephyr clients can download PDF versions of the workbooks). One
workbook incorporates four graphs on one page for each of the fifty states. A
second workbook uses the same analysis for the largest 25 cities. Of course, Zephyr
clients can create their own analysis for any of the 379 cities.
| Technical
Notes for StyleADVISOR Users To
create the graphs in this example we selected Fort Lauderdale from the Home Prices
database as our “manager”. For the “benchmark” we selected
the United States returns from the same database. Figure 2 is our Custom Axis
graph. For the Y axis we selected “Time” and for the X axis we selected
“Excess Return vs. United States”. We converted plot symbols to lines.
These options can be found on the right click menu (Select Axis Statistics and
Convert Plot Series). Figure 4 is our Manager vs. Benchmark graph. Here we selected
rolling return and set the rolling window at 4 quarters. To run this small window
size you must first select “none” in the Style Basis selection in
Analysis Parameters/Summary.
In all of these
graphs we have used the new Dynamic Text function to change the titles and legends
to reflect the actual indexes we are using. So instead of saying “Manager
vs. Benchmark” it says “Fort Lauderdale, Fl vs. United States Return”.
Because we used dynamic text this title will automatically change if we select
another “manager” and/or “benchmark.”
To create the four
tables of best and worst three and five year returns we did a search selecting
all 379 cities as “managers”. We screened returns for the best and
worst and highlighted the top twenty for each category. From the right click menu
we selected “create workbook for selected managers”. In that workbook
we added a custom table and selected the two statistics we displayed. |
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