Current Housing Fear Index (HFI)

Chris Waltzek

August 16, 2012

Although there are many useful factors for deriving home prices, such as regional market conditions, pool of available buyers, access to easy loans (FHA), low interest rates, unemployment level, and new home construction, analysts opinions (qualitative analysis) vary widely with regard to home price values. Quantitative analysis takes over where qualitative analysis ends. The Current Housing Fear Index (HFI)* essentially uses statistics to cut through the noise and rhetoric in order to quantify the true median home price value given the shadow inventory of homes (Figure 1.1.) and government largess, e.g.., QE and Fed stimulus represented by the M3 (Figure 1.2.):
Figure 1.1. US Shadow Inventory 2006-2012

Figure 1.1. Courtesy of USAToday.com

 

Figure 1.2. M3 Money Supply

Figure 1.2. Courtesy of shadowstats.com)

 

In order to determine a fair value for the US median home, first the 2006 HFI is calculated given total existing inventories in equation 1.1.. Next the 2012 median home price is calculated in equation 1.2:

HFI Total Inventories Formula (click links for data sources):

2006 HFI = 124,600,000 + 400,000 * $192,300 / 8,500,000M = 2.83
1.1
2012 HFI = 131M + 1,500,000 * $168,000 / 14,750,000M = 1.51
1.2.
To determine the current value of total homes relative to the 2006 housing market peak valuation, the 2006 2.83% figure is substituted into the 2012 computation as seen in equation 1.3:
2012 HFI = 131M + 1,500,000 * $Price / 14,750B = 2.83
2012 HFI = 131M + 1,500,000 * $Price = 2.83% * 14,750B
2012 HFI = 132.5M * $Price = 41742500000000
2012 HFI = $Price = $315,038
1.3

Therefore, given the total inventories and shadow stockpile, housing is a bargain. However this number is distorted due to the fact that only a fraction of the total inventories are for sale. The next set of equations adjusts for this factor. The 2006 HFI is computed given total homes for sale in equation 1.4.. Next the 2012 HFI is calculated in equation 1.5:

HFI Total For Sale Formula (click links for data sources):

2006 HFI = For Sale + Shadow*Median $ / 2006 M3 =
2006 HFI = 1.8M + 400,000 * $192,300 / 8,500,000M = 5%
1.4
2012 HFI = For Sale + Shadow * Median $ / 2012 M3 =
2012 HFI = 2.5M + 1,500,000 * $168,000 / 14,750,000M = 4.6%
1.5.
In order to determine the current value of homes for sale relative to the 2006 housing market peak valuation, the 2006 5% figure is substituted into the 2012 computation as seen in equation 1.6:

 

2012 HFI = For Sale + Shadow * Median $ / 2012 M3 =
2012 HFI = 2.5M + 1,500,000 * $? / 14,750,000,000,000 = 5%
2012 HFI = 2.5M + 1,500,000 * $? = 5% * 14,750,000,000,000
2012 HFI = 2.5M + 1,500,000 * $? = 737500090000
2012 HFI = 2.5M + 1,500,000 * $? = 737,500,090,000 / 4,000,000
2012 HFI = $? = 737,500,090,000 / 4,000,000 =
2012 HFI = $ = $184,375
1.6.

Thus, according to the HFI figure, in 2012, $184,375 is the fair value of the typical US house for sale. Since the 2012 HFI figure $184,375 is 10% above the current median house price $168,000, buying a home is deemed prudent. Put simply, after 6 years of brutal selling, despite the large shadow inventory, buying a home may be a wise decision.

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*Special thanks to James Turk and goldmoney.com for the use of the Gold Fear Index calculation.


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