Where's the beef in home-price reports?
Part 2: Real estate sky is not falling
By Bernice Ross, Friday, May 30, 2008.(This is Part 2 of a two-part series. Read Part 1, "Put a gag on Chicken Little.")
The Case-Shiller Index portrays itself as being "the leading measure of U.S. home prices," according to a Standard & Poor's press release from April. Given how much press the index receives, it may very well be the leader -- the leader in inaccuracy.
Last week's article looked at the contradictory data from OFHEO (the Office of Federal Housing Enterprise Oversight), NAR and Realogy vs. the S&P/Case-Shiller Index. This week, we look at additional pitfalls that explain why the press should not rely exclusively on the S&P/Case-Shiller data.
1. Where's the beef?
The S&P/Case-Shiller Index ignores huge chunks of data. Andrew Leventis, in a 2007 paper comparing the OFHEO approach to the S&P/Case-Shiller approach, explained the differences in the data in the following way:
"According to the methodology materials, the S&P/Case-Shiller Index does not include price data from 13 states. Market conditions in those 13 states have, on average, been stronger than in the rest of the nation. OFHEO's estimates indicate, for example, that three of the five fastest-appreciating states in the nation (Idaho, Montana and Wyoming) do not have representation in the S&P/Case-Shiller index … The S&P/Case-Shiller index also apparently has incomplete coverage in 29 states."
I have to wonder how the public would feel about the "national numbers" that include no data for 26 percent of the states and only partial data for another 58 percent.
2. A bogus claim
The S&P/Case-Shiller index claims to have "100 percent coverage" in nine states. The claim of "100 percent coverage" is false. In the description of their methodology they plainly state:
"The S&P/Case-Shiller indices do not sample sale prices associated with new construction, condominiums, co-ops/apartments, multifamily dwellings, or other properties that cannot be identified as single-family."
The most extreme example of this lack of coverage and how critical is to correctly assessing the market comes from New York City. The S&P/Case-Shiller Index claims that prices fell 5.6 percent during the first quarter of 2008. According to David M. Michonski, chairman and CEO of Coldwell Banker Hunt Kennedy in New York City, however, "Condominiums and co-ops account for one-third of New York City sales and 99 percent of Manhattan sales. Thus, Shiller gives the impression of reporting that prices have dropped 5.6 percent in a place where he does not cover 99 percent of the sales and where prices have not dropped, but risen, substantially."
Michonski's claim is based upon data from Miller Samuel, a highly respected appraiser who tracks New York prices. In a summary of activity in the first quarter of 2008, Samuel reports:
"The median sales price of a Manhattan apartment was $945,276, up 13.2 percent from the prior-year quarter median sales price of $825,000 and up 11.2 percent from the prior-quarter median sales price of $850,000 … Average price per square foot was a record $1,289 this quarter, up 20.5 percent from the prior-year quarter result of $1,070 and up 9.2 percent from the prior-quarter average price per square foot of $1,180 ... The 10.8 percent increase in year-over-year quarterly median sales price is the highest increase since the third quarter of 2006 when the increase was 12.7 percent."
3. Buyers and sellers make "mispricing decisions"
According to the S&P/Case-Shiller pricing methodology:
"It is also assumed that two sale prices that make up a sale pair are imprecise, because of mispricing decisions made by home buyers and sellers at the time of a transaction. Mispricing variance occurs because buyers and sellers have imperfect information about the value of a property. Housing is a completely heterogeneous product whose value is determined by hundreds of factors specific to individual homes … The difficulty in assigning value to each of these attributes, especially when buyers and sellers may not have complete information about each factor, means that there is significant variation in sale prices, even for the homes that appear to be very similar."
How does the S&P/Case-Shiller approach address this challenge? They use a mathematical "weighting formula." Yes, you read that correctly. The S&P/Case-Shiller approach asks us to believe that buyers and sellers who have actually seen the houses and the neighborhoods are less accurate in their ability to price property than the mathematical formulas from Wall Street and academia. This is absurd. Lenders don't look to computer-generated models to make lending decisions; instead they rely on those buyer and seller "mispricing decisions" (i.e. comparable sales) to determine how much they will loan on a given property.
4. Hedge your bet
Hedge funds use the S&P/Case-Shiller Index to allow investors to sell real estate "short." In other words, if you "hedge" a real estate investment, you are paid when the index declines in value. On the other hand, when prices increase, how much demand will there be for a financial instrument that reimburses you when property values decline?
Ultimately, the question is whom should you believe -- the academicians and Wall Street with their complex derivatives that gave us the subprime mess, or NAR, the federal government and the real-world numbers from publicly traded real estate companies? I know whom I trust -- how about you?
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
Ross will speak at Real Estate Connect in San Francisco, July 23-25, 2008. Register today.
***
What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
Bookmarking Sites
Add A Comment
You must login or register to post a comment.
Submitted by Matt Sicignano on May 30, 2008 - 7:39am.
Good explanation of a wall street spin on trying to establish the value of a house like they do a stock;imperfect, but for their purposes,OK. Your 4th bullet point, however, makes it seem like the index is only used to protect on the downside ie: "selling short". You can also bet on a rise in the housing market by going "long" on the index.
Submitted by Jerry Hoffman on May 30, 2008 - 8:19am.
Right on the money. These prognosticators make predictiions which turn into self fulfilling prophecies (e.g. Oil and Gasoline). Do we really need any more reason to keep banks (wall street) out of real estate? No substantive reason for the price fluxuations other than an "authoritative" suggestion. Tell the public to expect a rise in oil, and the companies will raise the price. Tell the public to expect $4 and $5 per gallon and the oil companies have no reason not to raise the price.
Matt's suggestion about going long on the index may be valid, but betting against the wall street spin, would be like going all in with a 2 and 3 off suit.
Submitted by Mark Burson on May 30, 2008 - 1:34pm.
The same real estate people that flag the Case/Shiller as flawed are very likely the same ones that ignored the data when it was suggesting this market was coming because of flawed professionals that had one eye on profit and the other on opportunism. These people were not scoffing when they were lining their pockets with the gain that brought this pain.
Submitted by Tim Ellis on May 30, 2008 - 1:52pm.
This is some hilarious stuff! Thanks for the laugh.
I wonder if Ms. Ross was the author behind the similarly-toned There is no housing bubble! blog?
Submitted by Silence Dogood on May 30, 2008 - 4:03pm.
A quick search of the Net shows that Bernice did not seem to have a problem with the Case-Shiller Index on January 19 07 in an article sub-titled "New business trends in '07":
"One of the most exciting innovations for 2007 is the creation of a real estate futures market. The contracts are based upon the Standard & Poor's Case-Schiller (sic) Metro Area House Price index that tracks price changes on existing homes in 10 major metropolitan markets."
Of course a person can change his/her opinion, but typically that is supposed to come from further research and reflection not because they publish numbers that you don't like. The article above is most certainly not a result of further research or reflection but knee-jerk reaction. The OFHEO published a revised paper that explains some of the differences in the numbers they deduce and the numbers that Case-Shiller deduces. The OFHEO was able to get the numbers closer when they did 3 things: remove refinance appraisals from their numbers, decrease the weighting applied to homes with lengthy time between valuations, and incorporate more data that the OFHEO does not currently use such as those homes with subprime loans, jumbo loans and more.
These 3 points fly in the face of the research done for this article. It turns out that OFHEO ignores huge chunks of data, doesn’t seem to have 100% coverage in ignoring these chucks of data and uses a similar weighting formula.
One way to undermine media sensationalism is to show shoddy research by the media and that seems to be the intention for this article. But in fact it seems pretty apparent that Mrs. Ross did much of her research through biased second hand sources rather than carefully researching and reflecting on anything that OFHEO or Case-Shiller actually published. Please visit www.ofheo.gov/media/research/OFHEOSPCS12008.pdf to read the report from which I gathered data.
Submitted by RK Ruthman on May 31, 2008 - 6:34am.
Sorry, but at best this is ground beef.
"...Ultimately, the question is whom should you believe -- the academicians and Wall Street with their complex derivatives that gave us the subprime mess, or NAR, the federal government and the real-world numbers from publicly traded real estate companies? I know whom I trust -- how about you?"
The academicians, and Wall Street were great when the commissions were readily coming.
Where is the article about "Real Estate Agents want the banks to stop giving out sub-prime loans"?
---But, there is an article on real estate agents giving the bank appraiser comparables.
Will mob mentality change today's housing market? Who knows?
Gaining trust? Well, if real estate is local, then trust is individual.
Submitted by Wenceslao Fernandez Jr on May 31, 2008 - 2:49pm.
My take on it is this. Since all real estate is local, and since even within a particular county prices may change by the neighborhood or building, buyers and sellers should note that there is no substitute in this market for hiring a powerfull real estate professional.
Buyers should take note that in many markets, we may be at the bottom they've been looking for and it is in their best interest to get off the sidelines and begin playing for real.
Sellers can no longer afford to guestimate and listen to and use national news information to evaluate how to best price and sell their home, specially if they MUST sell.
Both buyers and sellers should seek a professional TODAY. If looking for opportunities in distressed property purchasing or if a seller is finding themselves staring at foreclosure, they should seek a Realtor who is a Certified Distressed Property Expert for the advise they need.
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by bob jones on June 2, 2008 - 7:14am.
Glad to see a bunch of Realtors have nailed that stupid Yale economist and his lousy data. Keep fighting the good fight, keep the propaganda going strong, and bow at the altar of Lawrence Yun and David Lereah.
Seriously though, this groupthink going on here is not good for you. It's bad enough that the reputation of realtors is in the toilet and you all are generally regarded as very well compensated used house salesmen. If you keep poopooing the experts that have nailed this market, it only destroys what little credibility you still retain, if any.
It's pretty ballsy at this time (the worst recorded drop in year-over-year values in history) to gang up on a venerable economist and his data, especially when he's called it from the beginning.
Submitted by Not Given on June 4, 2008 - 12:49pm.
Wow. Even better than your last article.
1. "I have to wonder how the public would feel about the "national numbers" that include no data for 26 percent of the states and only partial data for another 58 percent"
I wonder how the public would feel about affirming the consequent to support a weak point. 70% of the entire country by housing value is covered AFTER normalizing the data. That means, at maximum, 30% of home price data is not captured by 26% of the states or roughly 1% of each underrepresented state on average. This is statistically insignificant.
I removed NY from the total US calculation and the result was . . . wait for it . . . WORSE! NY is remarkably stable and added stability to the CS index.
2. I can't find the quote you cite as saying NY home price fell 5.6%, but the data CS reports indicates that it fell 2.8% - or half what you said.
Further, CS extends the NYC MSA to include homes with in commuting distance and therein expands the data set to become more relevant.
3. First you skipped the part that the mispricing variance model introduces no bias into the index estimates but increases the accuracy of the estimated index.
Second, buyers are hardly ever objective when buying a house. If they truly were objective, then they would value a home as a highly levered investment rather than a home.
Third, Real Estate is the least liquid, least transparent market a US citizen can buy into. That is why brokers earn astronomically high commissions when compared to assets such as equities, bonds, options, futures, etc.
4. "Hedge funds use the S&P/Case-Shiller Index to allow investors to sell real estate "short."
For every short, there must, by definition, be a long.
"In other words, if you "hedge" a real estate investment, you are paid when the index declines in value."
If you are long real estate and short the index and the value of your real estate goes down, the hedge pays you money to compensate for the loss of on the real estate.
"On the other hand, when prices increase, how much demand will there be for a financial instrument that reimburses you when property values decline?"
None, but your real estate asset just increased. If you are hedged, the asset went up by at least the cost of the financial instrument.
"Ultimately, the question is whom should you believe -- the academicians and Wall Street with their complex derivatives that gave us the subprime mess, or NAR, the federal government and the real-world numbers from publicly traded real estate companies? I know whom I trust -- how about you?"
Way to wrap it up with an ad hominem attack. If you can't beat them with facts, taint the pool with innuendo.