Nate, I’m sorry if I came on a little strong on Saturday about the Case-Shiller Index. It has been bugging me for a while, and I might have took it out on you. Let’s take a closer look at it.

In the past we haven’t had a ‘reliable’ way to measure home prices, and just used the median price as a barometer that meant little or nothing – especially when people are suspect of anything coming from the N.A.R. cheerleaders.

But now we have the third-party authorities, Karl Case and Bob Shiller, with his Yale pedigree, who devised the Case-Shiller Index from their ivory tower.

Three excerpts from their latest press release:

S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices….

San Diego, in particular, has stood out with 14 consecutive months of increasing home prices.

San Diego had a one-year change of +11.2%

It has always been that home sellers have wanted to hold out for that last 5% to 10% as if it were life or death.  And yes, in some cases they’ve had no choice, due to loan balances.  But today’s sellers can hang their hat on the Case-Shiller’s claim that San Diego “has stood out with 14 consecutive months of increasing home prices”, with local media and realtors backing them up.

But are home prices really going up? What is really happening?

The Case-Shiller methodology page says that they only use the June data to figure the local index, and then the three months to calculate the national indicies.

The 14th month of increase was June 2010.  If you were going to see an increase in Y-O-Y sales prices around San Diego, it would be in 92130.  Let’s look at same-house sales in Carmel Valley:

Month/Year # of detached sales # who had previous sales since 2004 Avg. change since peak
June, 2009
June, 2010

Granted, Carmel Valley is just one segment of the San Diego market.

But if in June, 2010, the same-house sales prices in 92130 were DOWN an average of 11% from their peak price, when last year showed a 4% decrease, how can Case-Shiller Index can come up with an 11% INCREASE year-over-year in SD?

Here are the three reasons that I can think of:

1. Other areas in SD are doing better than 92130. (doubtful, but I’ll check)
2. Flipper resales are in the C-S index. (they only exclude those resold within 6 mo.)
3. The C-S Index is using ALL same-house sales.  (long-time owners are still making mega-profits)

One of the mysteries about the Case-Shiller Index is their weighting of the different variables.  But they say in one paragraph that 85% to 90% of the same-house sales used receive NO down-weighting – but they also don’t mention specifically if they only use those sold at the peak. 

If they are using ALL same-house sales pairs, and comparing a previous price from earlier than 2003, virtually every resale will show a positive gain.  If a house sold for $300,000 in 2001, and resold this year for $600,000, what does that have to do with today’s pricing trend? 

If you care to comment on their methodology (it’s a great read if you are a mathematician) or other thoughts on how they figure the 11% gain, Y-O-Y, please feel free.

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