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 HousingIntelligence.com 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.

Boyce Thompson asks crowd of builders "A Good Time to Buy?"

While I routinely check out Boyce Thompson's blog, I actually found the latest entry courtesy of Patrick.net. Boyce Thompson is the longtime Editorial Director for Hanley Wood titles such as Builder and Big Builder. What struck me was the headline: "A Good Time To Buy?" in which Boyce describes a speaker at a recent Hanley Wood conference:

A speaker at the conference Builder magazine is putting on this week had the audacity to say that he didn't think now was a good time to buy. He said that prices for new and existing homes are likely to continue falling this year, given that foreclosures are on the rise and the number of homes for sale is going to continue climbing...

It's a good thing tomatoes weren't served for breakfast, because the contrarian speaker would have been littered with them. Builders, it's abundantly clear, are sick and tired of hearing any negative takes on current market conditions. After all, they are fighting a life-and-death battle to keep their companies afloat. And one of their major leadership objectives is to prop up morale within their companies, especially among salespeople.

Spoiler alert: that speaker to whom Boyce was referring was himself.

Now Boyce is a smart guy who definitely knows about homebuilding from a macro-economic perspective, and I used to share the podium with him regularly when I was with the Market Intelligence division of Hanley Wood (he discussed national trends, and Market Intelligence consultants discussed local conditions).

But Boyce has also never been a homebuilder, he's always been a writer & editor, and I'm sure that's partly why his audience of builders didn't like what he had to say (plus they probably didn't expect the publishers of a trade journal to pile on, but their advertisers are manufacturers and suppliers, not homebuilders).

Still, that doesn't mean Boyce's speech was off point, but builders are an extremely sensitive group these days (and who wouldn't be considering the avalanche of bad news over the past 18 months), so he was certainly taking a risk in forcing some bad medicine on some unwilling ears.

I can certainly sympathize with Boyce -- every time I talk to a reporter I wonder if I've said something that will anger a potential client (it's certainly happened before), but if I'm seen as just another talking head for the industry then reporters won't call me -- in other words, a Catch-22.

More from his blog about this speech:

Later in the program the usual shots were taken at newspaper articles that contribute to negative consumer psychology. Private builders got their digs in about public builders that ruined the market by pursuing 20 percent annual growth at the behest of the public capital markets. Some speakers criticized cash-strapped builders desperate to sell homes by offering six-figure discounts that condition every buyer in the market to ask for concessions...

It's important that builders not "smoke their own," so to speak, that they not confuse what they are telling potential buyers and their employees with what they really believe. Most housing organizations, including the NAHB, are calling for a decline in housing sales and starts this year. Mortgage rates may be historically low, and recent moves to liberalize FHA credit and allow Fannie Mae and Freddie Mac to buy more high-priced mortgages may help. But probably not until later in the year...

At the same time, builders need to reach out to more potential new home buyers, even people who may have cancelled a previous new home contract. A far more sophisticated approach to demographics is required; we need to reach submarkets that aren't served by the existing home market. Rest assured, there are buyers out there who still need to move, who still need to buy a new home. We need to find them and convince them that our communities are ideal places to live.

The boldface above was mine: in my own experience, builder largely ignored detailed demographic supply/demand analyses in their market studies during the boom (at least in terms of what they asked from us; perhaps they did more detailed analyses in-house or had them produced from another source, although I doubt it). That's also why I blogged last week about Jonathan Smoke and his work at HousingIntelligence.com -- because he's ready and willing to delve much deeper in the demographics & psychographics of demand than most builders, lenders and investors have seen. Such detailed analysis could probably prevent another boom-and-bust cycle that was based not on actual demand but other ancillary reasons and pressures.

Finally, a closing note from Boyce:

It's important for builders as business managers to separate what they want customers to believe from what they know to be true. Everyone today needs to be planning for the worst and hoping for the best...Go ahead, throw tomatoes.