So Cal Real Estate News

(February 10, 2011)  At 9 A.M. Eastern Standard Time, on the last Tuesday of every month, McGraw-Hill’s Standard & Poor’s Unit releases the  Case-Schiller Home Price Index for the previous month, just like clockwork.

The news media love it:  “Breaking news” on housing they can schedule into their calendar months in advance, just like DataQuick’s monthly median home sales price reports.

Conversely, Case Schiller must love the media. If it’s the last Tuesday of the month, Case-Schiller will on the radio,  be all over the internet, in the networks’ evening news, and in the next day’s paper.

There’s one thing to love about the Case Schiller Home Price Index, and at least two problems.

About Case-Schiller, In S & P’s Own Words:

Let’s start by getting an overview “straight from the horse’s mouth:”

The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag.

Looks like we may have just given away one of those problems, but before we get into that, let’s see exactly how these folks come up with their numbers, again taken from their own website (links at the end of this post).  The key to their method is a tool Karl Case and Robert Schiller came up with back in the 1980′s.  According to S & P:

They developed the repeat sales pricing technique, still considered the most accurate way to measure this asset class. [even if they do say so themselves!] The methodology measures the movement in price of single-family homes in certain regions.

This is done by collecting data on sale prices of specific single-family homes in the region. Each sale price is considered a data point. When a specific home is resold, months or years later, the new sale price is matched to the home’s first sale price.   These two data points are called a “sale pair.” The difference in the sale pair is measured and recorded. All the sales pairs in a region are then aggregated into one index.

Sales pairs are carefully screened for any data points that would distort the index. These factors include foreclosures, non-arms length transactions (sales between family members) and suspected data errors where the order of magnitude of the change is substantially different from other sales pairs in the region.

Once the “sales pairs” have been screened, they are weighted:

The indices are designed to measure the change in the price of homes that have not undergone significant positive or negative changes in quality. Sales pairs are assigned weights to account for fluctuations in price that can be attributed to factors like extensive home remodeling, adding a home addition, or extreme neglect.

For example, the indices assign smaller weights to sales pairs with large change in sales price relative to the community around them. The assumption is that this change is due to remodeling or neglect. Sales pairs are also weighted based on time intervals between sales.  Sales pairs with longer time intervals are given less weight than sales pairs with shorter intervals to account for the probability of physical changes.

In other words, Case-Schiller compares sales of the same property, trying to eliminate sales where changes in value could be influenced by neglect, upgrades or sales between family members

What’s not to like about that?

All indices have strengths and weaknesses.

Problem # 1:  A bigger lag than you think!

One of Case-Schiller’s weaknesses seems pretty obvious:  a two month lag.  However, as the infomercial salesperson says, “but wait, there’s more!” Again, from Case-Schiller themselves:

The monthly indices use a three-month moving average  algorithm. Home sales pairs are accumulated in rolling three-month periods, on which the repeat sales methodology is applied. The index point for each reporting month is based on
sales pairs found for that month and the preceding two months. For example, the March 2011index point is based on repeat sales data for January, February and March of 2011.

OK, time for a pop quiz.  Exactly when will that “March 2011 index”  be released?  The last Tuesday in April!

We’re not just looking at a two month lag here–we’re looking at a two-month lag on stats averaged over three months.  Using the middle of that three month range, we’ve got a three and a half month lag, with a five month lag on the oldest stats!

“But wait, there’s more!”

When did those January, February, and March closings actually go into escrow?  Here in Southern California, the “average” escrow is about 45 days, although lending problems often stretch that out, especially in the current chaotic mortgage market.  In the current market, it often takes about a week of negotiation before escrow is actually opened.  Some agents wait even longer, until the buyer has a physical inspection completed and repairs negotiated.  So those deals that closed in January, February, & March were actually negotiated during last November, December, & January!

Yup, that’s right.  The price drop the media breathlessly hails each month took place on sales that were negotiated five to seven months earlier.  Now that’s what I call a lagging index!

Bet you don’t hear those little details on the news!

Other problems:

Case-Schiller tells us they try to “carefully screen” the matched pairs they base their report upon, but a computer can only do so much.  They can spot changes in square footage between sales, but tax records in California rarely reveal anything about most kitchen remodels, let alone “neglect.”   Sales between family members are easy to spot if everyone has the last name, but that’s only the case some of the time.  And what if the last name is as common as Smith, Rodriquez, or Nguyen?

Besides an amazingly long lag and probelms in screening the “matched pairs” of sales, other problems  include the use of broad regions. Real estate trends can vary dramatically between adjoining zip codes, school districts, and even condo projects; painting with a broad brush obscures significant details.

Since Case-Schiller reports an index, not actual prices, it gets even harder to interpret.  Does a 23%  drop in the index really indicate a 23% drop in prices?  Does anyone really know what it actually indicates?  If you’re a CPA or statistician, you might want to follow the links at the end of this post deeper into C-S’s explanations and let us know your conclusions with a comment.  In any case, with an “index” we’re an additional step away from actual prices.

Finally, for now at least, Case-Schiller doesn’t tell us anything about sales volume–it just gives us a cryptic but supposedly well though-out index of price.

So What’s to Like About Case-Schiller?

For all its flaws, Case-Shiller is an index that seeks to get beyond averaging medians (see “Two big problems with DataQuick’s monthly median price reports“).  It gives us useful data from a different perspective that can be helpful looking back.  But the time lag makes it problematic for forecasting or even for evaluating forecasts.  It’s hard to figure out what’s going to happen next, when you don’t yet know what’s been happening over the past three months.

So What Do We Make of Case-Schiller’s Latest Numbers?

As one would expect from a lagging index, they tend to confirm what we already know:  Prices were down dramatically earlier this year.  In fact, for the Los Angeles and Orange County regions, home prices last winter were down about 25% from a year earlier.  That’s the crux of yesterday’s C-S report.

The big mistake we see right now is the impression that this is a new, record-breaking drop.  It’s just old news about the record-breaking drop that was occuring in the market last winter, and that DataQuick when they released their their closing data for the spring months. Old news.

C-S’s latest report certainly doesn’t change the opinion of where the market’s headed that we posted last Friday.  Nor does it change our basic recommendations of what potential sellers and buyers should do in uncertain times like these.

Today’s unusual real estate market presents unusual opportunities along with some risks.  For buyers, the risks have been dramatically reduced from a year and a half ago, as Case-Schiller’s most recent numbers document.

For more information:

Link to Case-Schiller’s monthly Home Price Indices

Standard & Poor’s own description of their Case-Schiller index

Making Sausage: S & P’s own description of how the Case-Schiller indices are compiled

Wikipedia entry on the Case-Schiller Index (Not Wikipedia’s best article–disappointing and confusing)

 

Tags: Case-Schiller Home Price Index, Housing Market Indicators, housing market trends, real estate projections

This entry was posted on Thursday, February 10th, 2011 at 7:13 am and is filed under Market Trends and Projections, Real Estate 101. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.