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.
If in one month 10 houses sell for 250k each, let’s say, and then next month 10 houses sell for 300k each, the index goes up because more expensive homes are selling. The fact that all 20 houses all sold for 400k a couple of years ago is lost in the data.
I smell a market for an index that tracks prior home sale prices. The only thing it needs is a name. How about “Jim’s super-duper accurate price index” or even “bubbleinfo.com presents: your shitty home’s real value.”
I haven’t looked at the numbers but I bet they’re lagging likely back to spring/summer. I’ve never seen an economic model that’s real time.
A few thoughts:
1. “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? ”
It doesn’t matter whether there was a positive gain since it last sold. They are calculating a monthly index; the fact that a house’s value went up from 10 years ago won’t translate to a higher index for a given month.
It’s easier to explain with an example. Let’s say there are just two houses, with totally made up numbers for easy math.
House A:
sold 2002, $400k
sold 2006, $800k
sold 2009, $600k
So far, you would have an index that double in price from 2002 to 2006, and then fell in half again from 2006 to 2009. So the Case-Shiller index would assume in this case that the entire stock of housing doubled from 02 to 06 then fell by 25% from 06 to 09, meaning that it increased by 1/3 from 02 to 09.
Now, house B:
sold 2002, $200k
sold 2010, $270k
We don’t have a number for house B for 2009, but because we know what the index is worth (based on house A), CS would assume that house B was worth $300k in 2009. This is because house A (and thus the index in this example) increased by 1/3 between 2002 and 2009, and if house B increased by 1/3 that would bring it to a $300k imputed value in 09.
So seeing that the new sale in 2010 was $270k, CS would determine in this example that the house had dropped 10% between 2009 and 2010. (From its imputed value of $300k in 2009 to its actual sale price of $270k in 2010).
Given that the index is calculated off just these 2 properties in this example, the index would drop by 10% — even though the house B was up significantly since its last sale. So I don’t think your reason #3 would cause a false reading of higher prices.
2. I think there were probably many areas that did better than Carmel Valley in the past year. (Definitely not since the peak, but that’s irrelevant to the index’s value change in the past year). Many of the cheaper areas that got shellacked in the subprime implosion have gone up a lot in price over the past year, whereas the more expensive markets (not having gotten whacked as hard) haven’t come back like that.
3. Where in that methodology doc does it say it only uses one month for the local indices? I looked through (briefly I admit) and couldn’t find that.
I think it’s plausible that the San Diego homes THAT WERE SOLD in the past year were up 11% in price as of June. My guess about the disconnect is:
– The lag/3 month average, if they are doing that, but mostly
– The fact that a disproportionate number of homes sold in the past year were in the blown out subprime areas, which don’t overlap so well with Jim’s domain.
As evidence of point 2, consider the yoy changes for the CS price tiers:
under $317k – up 16.3%
$317k-$475k – up 10.2%
over $475k – up 4.9%
Now if you had a NCC (ex Oceanside) only index it would probably be down for the year. But that comprises a smallish portion of all homes sold, and so they get outweighed in the index by the ones that are going up in price. Unfortunately, this exacerbates the problem Jim is talking about where someone sees that the CS index is up, and so they think that just because Eastlake and San Ysidro (etc etc) have had big price increases, that means they shouldn’t lower the asking price on their overpriced NCC homes.
Rich
The published Case-Shiller numbers are a rolling three-month average, and the numbers being published now are really capturing spring and early summer. You’ll start to see Case-Shiller trending down as the three-month lag starts to include numbers from later summer when prices started to trend down again.
Areas with medians below 300k have been on fire since early 2009, and gains in those areas were greater than 11%. The higher up the price ladder you go, the more sluggish the market was.
I agree with nameless. Places like Eastlake that had tons of foreclosures in 2008 have done much better recently pushing up the entire county index.
Actually I wouldn’t even point at Eastlake as an example of a place that did well in 2009. Eastlake has been so badly screwed by heavy overbuilding that the rebound there has been mild at best. Encanto would be a much better example.
Thanks Rich for the detailed explanations.
They help illustrate my biggest beef – that everyone from Shiller himself down to local media and realtors mis-quote the event.
From the link above to the North County Times, here’s the lead paragraph:
San Diego County house prices rose for a 14th consecutive month in June, according to a respected indicator.
But it wasn’t the prices that went up, it was the INDEX that went up – which is a convoluted extraction based on complex algorithms.
I don’t think in reality you can connect the two.
There were hotspots where there may have been some houses selling for 11% more in June 2010 than similar ones did in June 2009, but it’s is very doubtful that there are many – if any – examples of actual sales of the same house exactly a year apart. But that’s the way they make it sound, that they’ve compared same-house sales and prices are up 11.2%.
Case Shiller uses SAME HOME sale to track prices. If the buyer bought 20 years ago and sold now than that is the gain they use.
If they think prices went up in San Diego, here is an example. Jim you had done a video about this property in Solana Beach and you said that he paid cash for it and people like him will not lower the price, please check out the link. He paid 1.76Mill. in 2008 and now asking 1.165Mill.
http://www.redfin.com/CA/Solana-Beach/720-Rawl-Pl-92075/home/4158458
Very interesting info. I was wondering the same thing in that the Point Loma / Ocean Beach area has still been trending down YoY.
August 2010 median price was 14.3% lower than last month, 6.8% lower than August 2009, and 18.8% lower than August 2008.
and I have a chart showing the downtrend:
http://www.mrplob.com/plobstats/plob-august-2010-median-and-volume/
I laugh whenever I read Statistics as I immediately go back to my intro to Stats College text book title… “How To Lie With Statistics”. http://www.amazon.com/How-Lie-Statistics-Darrell-Huff/dp/0393310728
Everyone has an angle… even “Respected Indicators”.
Nick the Realtor,
I’ll ask you kindly to not advertise your blog here. If I let one do it, then I have to let everyone, so the policy is no links – thanks.
Thanks aljanet, yes I said people like him will not lower the price – it was a general statement.
Those who stay on the market for the rest of the year must have some sort of motivation, and the listings still active by the end of October will be those who really need to sell. Otherwise they’ll wait ’til next year.
Are you still looking?
Karl Case’s op-ed on the market, dated September 1st:
http://www.nytimes.com/2010/09/02/opinion/02case.html?_r=3&partner=rss&emc=rss&pagewanted=all
Karl Case’s op-ed on the market, dated September 1st:
http://www.nytimes.com/2010/09/02/opinion/02case.html?_r=3&partner=rss&emc=rss&pagewanted=all
Jim the Realtor | September 6th, 2010 at 11:48 pm
From the link:
“But a little perspective is in order.
First, the bad news. What has happened in the housing markets since 2005 is a catastrophe that may take years for our economy to recover from.”
————
This is an issue that keeps popping up. People can say the words “housing bubble” but don’t seem to understand what that means. The “catastrophe” or “crisis” didn’t happen when the bubble burst, it happened during the 2001-2007 period when we allowed lenders to make loans to naive buyers who would never be able to pay off their debts. This lending environment pushed prices up well beyond their fundamental values (based on rents, incomes, and historical trends).
The “toxic” loans didn’t cause the bubble to burst, they caused prices to rise. It was the high prices that caused the bubble to burst because people were agreeing to pay prices that they could never afford to pay in the first place. That’s what you get when you give people a free call option on housing via low/zero-down loans.
Nice post CAR. I agree 100%. It was actually worse than you suggest though because not only did buyers get a free call option on housing but homeowners got free cash out money to do with whatever they wanted just because they owned homes during the bubble years.
Jim, We are looking but only if the price is right. I like to see what happens after the elections and if there will be another tax credit(hope not).
Jim – I think you may not understand the index fully. This index uses price changes for two arms length sales of the same single family home. So, using full sales for the same zip code may not be fully relevant becuase they need to be similar properties.
In effect, the index measures if prices for similar properties are moving higher. Houses in nicer areas that are unique are probably omitted because they may not be comparable to previous sales.
Why do people insist on dogging me right out of the box.
I’ve read their stinking methodology page a dozen times. I’m trying to point out that their calculations present a theoretical index number that doesn’t portray the reality on the street, and people want to argue that?
If in one month 10 houses sell for 250k each, let’s say, and then next month 10 houses sell for 300k each, the index goes up because more expensive homes are selling.
That’s not how the CS Index works, that’s how the median home price works which is why people feel median home prices are a poor indicator of home prices. The CS index looks at the same house sales, so in this scenario the CS index would not be impacted just because in the next month more expensive houses are selling.
There may be some faults to it, but you also have to look at the tiers. In the CS index there has been plateu/reduction in home prices over the last year in the $470K and over range. This suggests that the low end hit a bottom and is starting to recover while the high end continues to stagnate. The $470K and above tier represents 1/3 of the houses sold in San Diego. Considering that NCC is pretty much all in the $470K+ range, the CS index numbers are in agreement with what Jim’s seeing on the ground in his area.
I agree with the broader point that sellers/realtors are misusing the information on the broad San Diego County market to apply to the high end NCC properties.
Pemeliza,
Yes, you are absolutely right about the HELOCs and cash-outs that were enabled by the “fraudulent” transactions (sales to people who could never afford to pay the agreed-upon prices). It’s a disaster, for sure.
Interesting dialog. I have been trying to get a better handle on the CSI and relate it to my market. This conversation helps. I read an explanation in the CSI Q&A and it suggested that the CSI utilizes arithmetic weighting and is thus closer to an average price index; versus the OFHEO which utilizes geometric weighting and is therefore more closely related to a median price index. On Maui, where we aren’t subject to Case-Shiller due to population limitations, we are still seeing a decline in median prices. That being said, certain geographic areas and the high end in markets like Wailea have seen an increase in median sales prices year over year. Our transaction volume is up across the board in all segments. Will prices follow? In spite of the undeniable nationwide bubble / crash, all real estate is truly local.