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Are Case-Shiller home price gains real?

Friday, August 28, 2009

Mark Hanson comments on the recent upswing in real estate prices as indicated by the highly regarded S&P Case-Shiller Home Price Indexes. It seems that, almost every few months now, there's a new wrinkle in how home price changes are reported and, coming as it does amid what millions of people think is a bottom for home prices, this one's a doozy.

Mid-to-High End Sales – Very Important.
Not Representative of True Market

More mid-to-high end sales are occurring this year than last. They are not anywhere close to the bubble years due to the catastrophic loss of affordability through exotic finance but they have increased as prices fell. They are occurring at significant discounts to list prices and previous year’s sales as I have highlighted many times. At the same time, foreclosure-related resales are falling as demand from first-timers and investors who have carried the market for a year has peaked.

This seasonal mix-shift is almost exclusively responsible for the significant house price appreciation in any CA MSA’s over the past 90-days. Mid-to-high end sellers and buyers are the most seasonal of all. As soon as the summer warm months are over and kids are back to school these sales will drop considerably allowing foreclosure resales, which are not seasonal, to reclaim this mix. This will drop reported median and average house prices as early as September, which will be reported in October.
Here's the interesting part.

At this point, you might be thinking that Mr. Hanson has the calculation of median prices confused with the paired-sales methodology used by Case-Shiller, but he does not.

While I haven't read the details of how the index is calculated recently, one can immediately understand how the index values can be affected by how long the seller has owned the home after reading the following:
Who is the Mid-to-High end Seller? Why Is This Important?

Now, think about those that are selling these mid-to-high priced houses. It is not the person who bought from 2005-2007 on a Pay Option ARM with 5% down because they can’t sell. It is the person who bought years ago that has enough equity to dump the price, sell, and have enough left over for the down payment on the house they plan to steal in the desert.

Even with the price dump, a person who bought in 1999 for $450k — who saw their house price rise to $1.5 million by 2007 and subsequently drop to $700k — realizes a price gain and so does CS. Even though CS reduces the weighting of pair sales the longer ago they occurred — when this is all you have selling — it carries most of the weight.

The bottom line is that Case-Shiller reports what sold, period. It is my opinion that the real estate market is so thin and bifurcated that what is selling today is not representative of the true real estate market.

It likely is not accurately representing properties purchased during the bubble years that are now worth a fraction of their purchase price because they are not transacting.
This is apparently part of a private letter to clients. If anyone has a copy and would like to share some more details, please feel free to do so in the comments section or via email.

Maybe, I'll drop Mark a line and ask him if he would like to share any more details about this because my interest is piqued. Then again, I haven't checked Calculated Risk yet today and Bill might already have an analysis on this subject posted.

Anyway, this all makes a good deal of sense to me - aside from a few price ranges in a few areas of the country that may have hit bottom, there is much more work to do to get home prices back to more normal levels - and then there's the typical "overshoot".

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Anonymous said...

I agree that this is skewing the index. I also think that it partially skewed the index to the downside when subprime entry level houses were the majority that were selling.

As for the overshoot I think that it does overshoot but the new trendline is always adjusted up so it doesn't overshoot the moving average of the past as much. It overshoots including future new medians after prices rise. (as the genuinely will eventually) I think it still has a ways to go for mid to upper:

A)we still haven't dealt with alt-a
B)many unemployed are yet to drop off extended unemployment benfits
C)banks and mortgage pools still have yet to bring to market inventory.
D)lots of pre-bubble sellers holding out for better market
E)Jobs still tanking with nothing on the horizon (wait till CA budget cuts ripple)

There are buyers out however we just need this to balance faster without govt intervetion

accuriz said...

We have been reporting and discussing this matter for some time now. The Case-Shiller Index is a skewed Index. Yet, many economists base their predictions solely on this Index, further misleading the public. We've recently did a report on the the Case-Shiller Index released last week and how many different ways it was presented.

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