The Housing Chronicles Blog: Zillow suggests that Case-Shiller numbers mis-state the market

Friday, April 3, 2009

Zillow suggests that Case-Shiller numbers mis-state the market

For those homeowners who think Zillow's "Zesimate" is not an accurate barometer of their home's value, the company's VP of Data and Analytics, Stan Humphries, argues that their regional stats are better than Case-Shiller's because by including both market-rate homes and foreclosures, Case-Shiller both understates the pricing decline among foreclosed homes yet over-states the decline for homes not in distress. From his blog (hat tip: L.A. Land):

According to Standard & Poor’s, the Case-Shiller Index is “designed to measure increases or decreases in the market value of residential real estate.” It’s important to note, however, that “market value” according to Case-Shiller includes all arms-length sales of homes, even those of foreclosed homes.

It’s really an indicator of the change in prices of homes regardless of the circumstances under which they are sold. What won’t surprise many people, however, is that there’s actually a very large difference in prices between foreclosure and non-foreclosure homes...

Unfortunately, in combining both foreclosures and non-foreclosures into a single metric, you’re not really getting a good insight into either market. In the current climate, you’re underestimating the decline in value of foreclosed homes and overestimating the decline in value of non-foreclosure homes.

More importantly, from a consumer perspective, homeowners probably infer that home price indexes are a general indication of the real estate appreciation that they might realize if they were to sell their own home...

For homeowners thinking in this way, Case-Shiller is not a good measure for them to use because the assumptions used to interpret the data do not match the assumptions used to create the data...

Click here for entire post, which includes graphs and tables to make the point in greater detail.


John Reeder said...

Zillow's point here seems idiotic. The notion that the housing is somehow worth more depending on who owns it doesn't make any sense. Do non-REO sell for more than REO? Yes, but they also sell less often, and they take much longer to sell. It doesn't matter who owns them, it matters whether they need to sell in 60 or 90 days. If you are going to be moving, and you have to have your house sold in 60 days, it doesn't mean that you should look at non-REO numbers in order to comp out your house.

But Zillow's argument is that it matters who the Seller is.

David G from said...

John -

Think it through - you've almost got it. It's not so much "who" the seller is but what their motives are. Owners seek equity gain primarily and will wait for it (relatively speaking) at the expense of cash flow. Many will pay two mortgages while they wait for their price. But they still rep. most of the transactions. Investors (mortgage holders) are entirely different ... they seek cash flow primarily and will take it at the expense of equity gain (though you wouldn't think it by how slowly some react to offers.) So, prices are higher in the price-sensitive market and lower in the time-sensitive market. You're assuming the consumer-owned market is time sensitive - it's not. So, distressed sales are typically ignored when determining "market values."

Now, if you live next door to a REO and have to sell immediately, you will need to compete with that home's price - but that's not how most market(s) play out in the aggregate.