Friday, Oct 02, 2009

Some weakness with the nationwide index that helps explain the current "boom"

Investor's Chronicle: More doubts on house prices

Not a criticism but simply a feature of the Nationwide index which suggests the recent rally is not as strong as many would like to believe.

Posted by chrisch @ 09:31 PM (1618 views)
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1. sybil13 said...

Link doesn't work for me paste this

There are reasons not to. One of these is that, when transactions are low, only the best houses sell. Because Nationwide's index can't fully adjust for this, this imparts an upward bias to measured prices.

There is, though, a second problem. Nationwide measures prices when a mortgage is approved. However, Bank of England figures show that a large number of mortgage approvals - almost a fifth of the total - are not subsequently taken up. This means a large chunk of Nationwide's prices relate to transactions which never actually take place - which is a peculiar use of the word "price."

I doubt we will read this in mainstream press!!

Friday, October 2, 2009 10:06PM Report Comment

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3. Johnny5thumbs said...

In my area, cash buyer sales are about the only sales taking place. Since Nationwide data is based on mortgages and cash sales are comploetely excluded, this means their figures are skewed or, at worst, nonsense.

Friday, October 2, 2009 10:31PM Report Comment

4. greenshootsandleaves said...

Oh, really? Well, it's a good thing no one takes the index too seriously and reads too much into the monthly figures, then!

Saturday, October 3, 2009 12:18AM Report Comment

5. techieman said...

i agree with the bulls here - the indexes are what they are and have flaws that mean they underestimate or overestimate increases or falls. Whether they are a true reflection of the state of the market they are the best we have. Since there is no homogeneity in housing the indexes are only a broad brush of the trends. They might very well exaggerate them and in my "game" you need to look at indicators other than price to get some clues of the strength of the underlying moves.

You cant use them to support your argument on the one hand and then ignore them when they go against you, but you can - for yourself - determine if they stand up under scrutiny. Lets put it this way if you trade the housing index you cant say - well they should be down because they were going down on huge volumes and have only been going up on a trickle.

Incidentially thats why i wouldnt trade them - particularly not as a hedge against a property value falling if i owned one. The correlation risk is big as far as i can make out, and anyway the spreads are ridiculous, buts that a different issue.

The problem with this index is the same as the problem with alot - the stock market indexes can be criticised in similar ways - a fall in the index might be because of a fall in a major component of it, but the rest of the market stays the same.

The "pure" markets are homogeneous commodities - a bushel of wheat, coffee (particular grade), Gold, Silver, etc etc.

IF you want to say -but yes they influence the masses - well i say so what? Masses are always most wrong at market turns at overbought (and oversold) levels, so (at certain times - when the right components are in place) its good news for the bears that the masses think the bull has resumed.

Is that time now? Well we will have to wait and see....

Saturday, October 3, 2009 08:28AM Report Comment

6. Norfolk And Goode said...

another factor that is rarely mentioned is there are very few FTB so the lower value properties aren't selling, this will also distort Nationwides figures.

Saturday, October 3, 2009 10:45AM Report Comment

7. str 2007 said...

Hi techieman

Interested to hear what you made of the market activity yesterday ?

If this does make a turning point, which sectors and stocks do you see most likely to suffer from a turn in the market.

IE a rising market floats all boats .......................

Saturday, October 3, 2009 10:45AM Report Comment

8. icarus said...

techie - but you haven't dealt with sybil's point that there is a systematic bias in the index which hasn't been taken into account - namely that it doesn't adjust for the greater proportion of better houses changing hands when transaction volumes are low. (There's seems to be no necessary bias regarding her second point, though.)

Saturday, October 3, 2009 11:06AM Report Comment

9. techieman said...

STR 2007. I said i am a little confused by the action to be honest. I was expecting a foray into the low to mid FTSE 5200 level to finish off (that would have tidied up the chart - but the failure to do that in itself is very bearish). I am also expecting a retracment in the S&Ps - which i am already short of and have created a tight stop to lock in some profits of what i think will be the first move down.

As you know FTSE 5,000 was breached to the downside, infact the next level of support 4950 - was touched (after the US employment numbers) and contained the selling. Its a tough call to be honest - i.e. do we have the top in or will 4950 hold and a new (final) swing high off that? i think that this first leg wont be an easy trade, i can see the retracement toward the high squeezing some bears first. I might get involved on the basis of a couple of bites at the cherry and be quite conservative, so i dont think it wise to put any levles down. A bit of a watching brief.

I do expect a rally though but dont know if that rally has started off 4950 or if it will go lower, run the 4950 stops then reverse to the upside. As i said i am sidelined. The S&P charts are easier to "read" in my view, and i think the top is in on those, but that we are due a rally - but again if and the extent of the rally are the questions there. Lets see what happens with the expected bounce next week, its the format of that that determines where to try to get in with a sensible risk / reward.

I have said trying to sell off the top is dangerous, because you never know where the top is!! I think its about 60/40 that the top is in (since march), a break of 4950 downside will increase that probability, but its then likely to have a move back up. Basically if i t breaks 4950 i will be looking for a short entry on a retracement. The weeklies dont look good.

If it doesnt - i.e.. retraces first towards the high, i will probably short it on more confirmation - and if i am early, sell some more on stop below 4950.

As for sectors - that doesnt come into my method, leaders and laggards etc. I dont trade individual stocks or sectors.

All in all i have been saying that the risk is to the upside and that looks to have been about right. Timing the exact high is difficult - sometimes you can do it and seem like a physic and sometimes you cant. After all im not Derren Brown.......

Have a good weekend!

Saturday, October 3, 2009 11:18AM Report Comment

10. techieman said...

Hi Icarus,

You are right, i havent dealt with it - i just say this. The point she makes is secondary to the indicies themselves. As you know volume is an indicator of the strength of trends, so its not just price that has to be taken into account, to try to determine trends and/or trend changes.

The weighting is yes a problem - in any set of non homogeneous data there will always be problems. And so i take the point that underlying the data the picture might not be as rosy as it seems. But the index is the index. I dont say it makes me bullish but i dont really want to split hairs and use the problem as an excuse for the market going up - although that excuse may be a fact.

When we look back at this in history and if this is, as we expect, a dcb / bull trap, then the indicies will come down and this will be shown as a blip on the chart. However the discounted index value may or may not - in a positive or negative manner - correlate to the price of the place you want to live in. The fact the index has a bullish bias to low transactions because of larger houses, will probably, in my view only be temporary. If transactions increase -if we are expecting the lower rungs to have forced sales - then eventually the bias will return in favour of the bears, and will we be mentioning that?

Saturday, October 3, 2009 11:40AM Report Comment

11. icarus said...

Thanks for that, techie. Yep, we're dealing with the non-fungible, but we have to do the best we can within that constraint. All I'm saying is that obvious biases should be eliminated if it's possible to do so, whether that makes it look good for the bulls or the bears. In principle this particular bias is easily eliminated but I don't know about the practical difficulties. Still, estimates of this bias could be made and integrated into the indices. We shouldn't just say "well, it gives us a broad idea of the trends and any biases even themselves out" or "low transaction volumes favour the bulls but higher volumes favour the bears, so six of one and half a dozen of the other".

Saturday, October 3, 2009 11:46AM Report Comment

12. techieman said...

icarus - fair point - but i dont think:

1. there is an incentive - particularly if the bias is a bullish one
2. How would we go back and reset all the indicies for all the periods.

Modifying the indicies is probably not beyond the wit of man, but it needs someone more clever than me! As i said i think the indices have to be particularly critiqued if you are trading them. Perhaps if we had sub-indicies for fixed value strata of data - probably by dwelling type, e.g. studio, 1 bed flat, etc etc and then by area. That would reduce the problem .... but who would do the work? That would be interesting.

I think in the US they base the indicies on the median homes by (big) area and nationwide, but i dont intimately know case shiller.

Saturday, October 3, 2009 12:30PM Report Comment

13. greenshootsandleaves said...

techieman @ 4 'they (the indices) are the best we have'

Not really. You just have to wait a little bit longer for the more accurate ones to be published, that's all. Commodities can be bought and sold on within days or even hours, hence the need for up-to-the-minute information. But property!? Since most people will be saddled with a mortgage spanning decades, why settle for an exit poll or whatever when you can have the actual election result? You may be two or three months late in buying into the next bubble (the Daily Mail currently estimates that costs £56 a day, by the way) but you just might spot a false 'dawn' or two.

Saturday, October 3, 2009 12:33PM Report Comment

14. techieman said...

greenshoots - fair point but since you are a member of the market, in any market the deal is between the two participants. So it is reflected just with a lag. As i have always said prices are determined at the margins.

And as for the Daily mail..... well the problem i have with the press in general is very few have come up with any sort of sensible prediction for anything. So the 56 quid a day estimate is "disgardable" as soon as its published. [and im not saying that as a bear - it could be £20 or £100].

Saturday, October 3, 2009 12:38PM Report Comment

15. techieman said...

in other words you dont have perfect knowledge and the price is what someone is willing to sell at and what someone else is willing to buy at. This can be skewed if you have to sell or have to buy, so if volume is low a small number of such transactions can clearly distort the market movements - even if the underlying asset was homogeneous - which of course it isnt!

Saturday, October 3, 2009 12:42PM Report Comment

16. techieman said...

sorry to go on greenshoots but the issue here is that people take account of the indicies in their assessment of trends - so obviously you are right at the micro level, and of course any single property can change hands for anything - potentially ignoring a crash if its a 'must have'.

Here i think we are looking at the macro level in generl which is why the indicies are regarded as important. We are just discussing if they shuould be viewed that way or if they should be viewed with caution.

Saturday, October 3, 2009 12:47PM Report Comment

17. techieman said...

"disgardable" - eh!! sorry i meant "disregardable"!

Saturday, October 3, 2009 12:53PM Report Comment

18. str 2007 said...

Cheers techieman.

A confused picture indeed, amazing how US Non Farm figures can move the market, only for whatever news moved it not to seem to matter after a few hours.

Saturday, October 3, 2009 01:43PM Report Comment

19. greenshootsandleaves said...

techieman @ 14

I like HPC's presentation of house price statistics and predictions (on the home page). Difficult not to view them with caution when, for the same month, say, there are such wide variations. Now then, in picking out what they feel the general public needs to know, the Mail/Express/National Association of Estate Agents or whatever are trying to turn rash choices at the microeconomic level (with the panic-inducing figure of £56/day representing the speed of the boat that is about to be missed) into macroeconomic trends. At the moment it doesn't matter much anyway since caution is now exercised by banks in the form of restrictive lending criteria. With an eye to the future, however, there may well be a case for treating house price indices in much the same way as opinion polls, i.e. requiring that they be published with at least a few clues as to how they were produced.

Saturday, October 3, 2009 05:08PM Report Comment

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