How Far Have Prices Dropped?

New York-The myriad of firms and organizations tracking home prices all agree on one thing: values have fallen nationally and by double-digit rates in some regions of the country.

But beyond their agreement on the direction of housing values, there is a widespread disparity in the actual numbers, with the widely followed Case-Shiller home price index and the National Association of Realtors monthly sales data showing much larger declines than repeat-sales indices such as those from the Federal Housing Finance Agency and Freddie Mac.

Real estate economists Michael Sklarz and Norm Miller, co-founders of Collateral Intelligence, think they know why. They say Case-Shiller has exaggerated home price declines for most homeowners.

They argue that Case-Shiller and the NAR, which mix distressed and non-distressed home sales, have overstated price declines in most areas. They also say that as foreclosure sales have increased, the discounts associated with foreclosure prices, historically about 22% below normal market conditions, have increased to 25% to 50% in many markets. That reflects the often-deteriorated condition of REO homes and other drags on the market for distressed properties.

The Collateral Intelligence executives say that because of the widening foreclosure discounts, distressed sales should be examined separately from non-distressed sales when evaluating market conditions and likely future movements in home values.

Mr. Sklarz told MSN that the huge volume of distressed and bank-owned home sales is skewing the market today. To get a better picture of market conditions, he said people who track home values should disaggregate distressed home sales data from homes sold through normal channels.

Mixing them essentially exaggerates the declines seen in a metro area with pockets of foreclosure, Mr. Sklarz said, citing San Diego as an example. While Case-Shiller may show the market down by double-digit percentages, he believes that most neighborhoods in the San Diego area have actually seen significantly smaller declines.

He says that mortgage servicers making decisions about things like loan modifications need to analyze "micro market" data rather than assuming that every mortgage in a given area is underwater because of price declines.

Overstating or misstating home price data by looking at metro area figures rather than micro-market conditions also have implications for loss reserves and bank capital data, Mr. Sklarz said.

"We see very diff things going on just within one ZIP code," he added.

The economists behind the S&P/Case-Shiller home price index, Robert Shiller of Yale University and Karl Case of Wellesley College, could not be reached for comment at press time.

The Collateral Intelligence founders also argue that in the absence of reliable indications of home values and likely future trends, mortgage servicers are unprepared to make appropriate decisions about foreclosure and loan modification alternatives.

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