The Housing Chronicles Blog: The flaws of home price indices

Friday, May 2, 2008

The flaws of home price indices

One of the ironies of journalism is that those who work in an industry -- and generally know it the best -- are typically prohibited from writing for mainstream newspapers or websites due to actual or perceived conflicts of interest. So when a source such as S&P/Case-Shiller or the NAR releases its numbers tracking the market, those figures are generally reported as fact with little regard to their accuracy.

Thankfully, a recent article at MarketWatch argues that some of these widely reported numbers may be skewed due to methodologies that aren't taking into account some of today's market anomalies:

Top officials with the National Association of Realtors and Standard & Poor's, which issues the S&P/Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels -- national, state and regional -- due to rare market conditions that are skewing survey results.

The NAR reported last week that U.S median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly -- a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates, coupled with a foreclosure-driven spike in cheaper homes...

The S&P/Case-Shiller index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own -- it tracks just 20 major markets, many among the hardest hit, and its "repeat sales" survey by design pulls in individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed homeowners and investors who bought at peak market prices and face higher mortgage-rate adjustments...

As reported Tuesday, the S&P/Case-Shiller Home Price Index's12.7% decline in February was the largest drop since its creation in 2001. Despite that index's limited seven-year history, the Associated Press reported that home prices "plunged by a record" percentage and "at their fastest rate ever."
The glaring discrepancy in this case is that 17 of the 20 metro areas posted record annual declines, and yet 78% of the 330 metropolitan regions that NAR tracks reported price increases in the latest period -- and that despite the acknowledged downward bias in current price readings.
S&P Index Committee Chairman David Blitzer acknowledged his organization's overall and metro-market readings paint an incomplete picture. For that reason, he said, the report now charts price changes in 17 of the markets at three specific levels - low-, mid- and high-priced homes -- to provide a clearer assessment.

In the high-priced San Francisco area in February, for example, homes priced below $512,000 fell 32% in value from a year ago, while homes priced from $512,000 to $750,000 fell 21% in value and those over $750,000 fell 6%...

If homeowners want to determine their property's value, it's never been more critical to take the measure of recent sales by home-price level in their town or city neighborhood.
"Just like saying the average nationwide temperature today is 57 degrees doesn't tell you anything, the same is true for real estate prices," Yun said. "The only way to tell what your own home is really worth is to look at local-market conditions, do Internet research and utilize professionals (such as licensed appraisers) to help determine the value of your home."

Jonathan Smoke at also blogged about this same thing today, with some other good points made:

To make proper conclusions about nearly anything housing related, you must be able to understand the neighborhood level context, and by neighborhood I mean at least as granular as the zip code, but ideally more lower like census tract or block group or actual subdivision. And at that granular level you need to know:
• What has sold and for what price?
• Who lives there and who is moving there?
• What can you learn about the type of customers and what they are buying?
• What’s the current inventory?
• What are the relevant trends?

So to do this, we must go beyond admitting that just home price data are flawed—almost all existing housing information resources are flawed...

We need granular home sales and home price data. By granular I mean down to the neighborhood.

We need to be able to slice and dice home sales and home prices by existing vs. new, size of home, features of home, and type of home.

We need to track home builders and their market share, price per square foot and more.

We need to track permits and existing inventory.

We need to track real consumer-driven demand, not the demand most people settle for (what sold last year)...

Right now I am raising investment capital so I can properly license all necessary data and complete the development to make this a reality. We know how to do it, so it’s only a matter of time.

If you are interested in investing or simply want to put your name on an interest list for access to this kind of housing intelligence, please contact us and let us know of your interest. And stay tuned, as we will make progress quickly.

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