The MIT index is a hedonic transactions based index based sales from the NCREIF index, and it attempts to find price movements of a "typical" property. The interesting thing is that the Moody's Commercial Property Index is still falling:
So the question is whether the MIT TPI is a leading indicator. My sense is actually that Apartments and Industrial Real Estate will come out of this thing earlier than other generic types, but I am not sure that anything is really at bottom yet. In particular, the MIT folks are showing that demand and supply are coming closer to lining up, but there is still excess supply nationally in the industrial, office and retail sectors.
15 comments:
The ethical thing for them to do, would be to forego the charts and bs due to lack of data. In their discussion of methodology they themselves note:
"Question (Sufficiency of Number of Observations):
“The MIT website indicated transaction volume was extremely low in Q408, which calls into question
whether there was sufficient data available to support the current index value, particularly at the assetclass
level.”
Response (DG):
Regarding your question about the number of transactions, in effect, the sufficiency of the
sample size, we are getting scarily low. My sense (this is based on my experience and judgment,
not formal statistical science) is that we are still OK at the aggregate level, for the all-property index. I have less confidence in the individual sectoral indexes. As I suggested on the web site, I would recommend consulting the Moody's/REAL Commercial Property Price Index for a transactions-price index that is based on a broader population and hence much larger sample of
transactions, particularly for looking at the sectoral level. The Moody's/REAL CPPI is
comparable to the variable-liquidity (equilibrium) price index version of the TBI, only the
Moody’s index tracks a much larger, broader population of commercial properties based on the
Real Capital Analytics database. (You can download the Moody’s data from either
http://web.mit.edu/cre/research/credl/rca.html
or
http://www.realindices.com/real/index.htm
as well as from Moody's).
Having said that, I must say that the three TBI sectoral indexes that we were able to produce this
time (as noted, we couldn’t do retail due to complete lack of sales), look fairly reasonable to me.
This despite that they have only about a dozen transactions each. We don't have a policy of not
publishing a TBI just because of few data observations, but one certainly does need to keep that
in mind. In general I have been pleased with how reasonably the indexes seem to perform even
with surprisingly few observations. We employ a noise filter that seems to be very effective.
Nevertheless, as I said, I would take the sectoral indexes especially with a grain of salt." (pg. 10)
This means we have entered sample-size hell. They are working on the principle that what you say to the dog doesn't matter, only your tone of voice.
They discuss their methodology in a press release. Good grief.
Also: "The price and sales models that underlie the TBI use as a composite hedonic variable the quarterly-updated self-reported (appraised) values of the properties as reported into the NCREIF Property Index."
The problem with supply/demand is that demand was artificially magnified by loans to people who don't repay. They just wanted to flip the property to someone else, or endlessly refinance at near real ZIRP rates.
People who do repay loans out of earnings still want property, but can't make up for the loss of demand from people who don't repay. Of course, loans to people who don't repay are a terrible way to run an economy...
To put this another way, people who repay loans out of earnings can only do so if purchase prices allow for them to do so. Rents must cover expenses, plus loan repayment. Prices must revert to marginal utility, instead of staying at bubble levels.
Otherwise, a whole new generation of bad loans will be made.
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This bar clearly indicates that demand is up in market and so do the prices. This is good news for the market but inventory is too low.
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Very interesting study from MIT, but I doubt the real estate market has hit the bottom. It could keep going down next year 2010 considering the financial system is still somewhat in a mess.
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