Following yesterday's news that the Case-Shiller Index showed the second-straight month of home price gains in June, analyst Mark Hanson, of Mark Hanson Mortgage Advisors is out calling the numbers the "ultimate false bottom."

The argument that the current bump-up in housing prices is meaningless is one that's been going around for awhile and that we've addressed before. The idea is that foreclosures sales are home-price killers when they occur. But they are non-seasonal and have basically held steady. All that the home price increase reflects, then, is the expected seasonal increase in higher-end, non-foreclosure sales.

This chart from Hanson explains

He also makes an important observation about who is the current mid-to-high-end seller:

Now, think about those that are selling these mid-to-high priced houses. It is not the person who bought from 2005-2007 on a Pay Option ARM with 5% down because they can’t sell. It is the person who bought years ago that has enough equity to dump the price, sell, and have enough left over for the down payment on the house they plan to steal in the desert.

Even with the price dump, a person who bought in 1999 for $450k -- who saw their house price rise to $1.5 million by 2007 and subsequently drop to $700k -- realizes a price gain and so does CS. Even though CS reduces the weighting of pair sales the longer ago they occurred -- when this is all you have selling -- it carries most of the weight.

The bottom line is that CS may not be accurately representing properties purchased during the bubble years that are now worth a fraction of their purchase price because they are not transacting. If they did it would put offsetting pressure on the index. But the homeowner who bought at the peak in 2005 is sure feeling the negative-equity pain from the comparable sale at $700k. So much so, he is at an exponentially greater risk of loan default and foreclosure.



The kind-of good news: Hanson believes that home prices have probably stabilized at the low end. But at the high end, where you've got all those folks with their 2005-vintage Pay Option ARMs, there's still a long way to go down.





