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66 untrue for many houses within a given market area, because the standard indexes relied upon, such as those we produced at Case Shiller Weiss, reflect the averages of the area's home price changes. ese indexes were not intended to describe the changes in value of all houses, because even homes located next to each other can vary in value, style, and age, and therefore vary price direction. Current market conditions around the U.S. exemplify this fact. In Atlanta, home prices are reported to be rising slightly. After all, houses below 1,500 square feet that were built between 1940 and 1980 rose a healthy 2 percent in the first quarter of 2014, whereas the prices of larger houses built after 1980 and before 1940 actually fell more than 2 percent. In the New York metro area, major indexes report that prices fell by less than 1 percent in the first quarter. Again, this is true on average, but the smallest houses (about 1,000 square feet) and the largest (over 4,000 square feet) fell about 2 percent in the quarter. House prices can move in unison under extreme market conditions, such as booms, bubbles, and crashes, but price changes can vary widely while these conditions are forming. e ways that prices vary can give clues about pending market shifts, and the resultant shifts can be integrated into trend-based forecasts to reveal potential price turns upward or downward. To better understand the concept, one can examine the way that a housing bubble "bursts." Sellers at the tail-end of a bubble will hold out for the high expected price of their home, but offers don't arrive or are too low. At some point, one seller in the market can hold out no longer for the price they desire; life circumstances or loss of patience forces them to accept a lower price. When one seller has capitulated, word spreads, and other sellers accept prices lower than hoped for. News of these sales tends to lag, however, and unlucky buyers, lenders, and (very lucky) nearby sellers will continue to help bid up the other houses. As the bubble begins to burst, the first houses that sell at a discount are the "canaries in the coal mine." ese "canary" houses are the leading indicators of increased risk of overall decline in the near future. is effect could be seen in major markets around the U.S. as the bubble began to burst, first slowly and then much faster, in the mid- 2000s. In southern California, the first houses to decline were in southern San Diego. e initial decline began in March 2004, and 19 percent of houses turned from appreciating to depreciating in the subsequent 12 months, all the while 85 percent of homes in Los Angeles were still rising. It was not until January 2006 that more than 50 percent of the homes in LA began to decline. During the first year of the bursting bubble, major home price indexes continued to report a rising market, but at an increasingly slower rate. As the crash unfolded, a simplistic take-away for homeowners was "my house is rising, but more slowly, just like the index." e reality was that an increasing proportion of homes' prices were falling rapidly while other homes continued to rise. Homebuyers, lenders, and investors would have fared better had they been aware of the increasing number of houses selling at lower prices, rather than knowing that a mythical "average home" was still rising modestly. With such knowledge, fewer houses would have seen absurdly high bids, and therefore would have had less distance to fall. Better forecasting and information dissemination could have saved individual participants, and the economy itself, from a great deal of damage. When more houses turned downwards, had lenders not loaned at the negotiated prices, then the sale prices would have been forced down to a more realistic long- term value that would have been more stable for the home buyer and the lender. Fast forwarding to the present, home price indexes are reported to be rising at a slower rate nationally than in the previous year. However, scores of sub-markets are actually declining. ese sub-markets include houses across a wide range of values in New York, Chicago, and many other important metro areas. e prices are strong in certain markets at the low end, but not the high end. is strength may be due only to intensive investments intended for rental portfolios. It appears that a number of factors are contributing to this price weakness, including a hike in mortgage interest rates in the spring of 2013, continued weakness in wage growth, and historically high unemployment. In addition, it has become much more difficult to qualify for a mortgage, in spite of low interest rates, given changes to banking regulations that began this past winter. To some degree the weakness has been masked by investors buying lower-priced and REO homes as rental investments across many markets. When these investors take a pause, it is difficult to imagine that owner- occupant purchases can replace them as a support for future prices given the difficulties that homebuyers face in obtaining financing. Now might be a good time for mortgage originators and other decision makers to begin layering these broad leading indicators, as well as granular price direction information, into their decision and risk management processes. If market leaders can broaden their perspective and deepen their granular analysis, mortgage investors, homeowners, and the overall economy could be materially better off in the coming years. "As the crash unfolded, a simplistic take- away for homeowners was 'my house is rising, but more slowly, just like the index.' The reality was that an increasing proportion of homes' prices were falling rapidly while other homes continued to rise."

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