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Also in the news…

Another interesting bit of information from our friend, Mark Sprague, In-house Analyst, Independence title:

The Case-Shiller index made news nationally last Tuesday, showing housing process dropping more than 1% in October, the most recent numbers available. See the full article here:

S&P/Case-Shiller shows home prices down again in October

Many will see this headline and decide that home prices in Austin and Texas are in the same boat.  Here is why this is not true.

The Case-Shiller index has reported home values for nearly 30 years. The index has become a widely reported and analyzed measurement of the housing market, looking at home values of repeat sales in particular. It is commonly referred to by the media, especially as the index has dropped in recent years. Few, if any, other statistics are more watched than the Case-Shiller by those in the housing industry.

And, yet, it contains some flaws and limitations. Among my concerns are the relatively small sample size, and the fact that the index only looks at repeat sales, with new homes, condos, and multi-family units out of the mix. Mostly though, the measurement is limited due to the fact that the “national housing market” does not exist.  There is no such thing as a national real estate market, and I believe that Case-Shiller should be given less weight by the media.

All real estate is local. No matter what the Case-Shiller Index says about the country, what matters to your local market is what’s happening in your local market. Each neighborhood has its own housing economy and that’s something that can’t be captured by a national report. A sale in Detroit does not affect a sale in Austin.  As a buyer / observer in today’s market, you can’t take the Case-Shiller Index at face value. It’s methodology is far too flawed to be the “final word” in home prices.

§  The first big Case-Shiller Index flaw is its relatively small sample size. S&P positions the Case-Shiller Index as a national index but its data comes from just 20 cities total. And they’re not the 20 most populous cities, either. Notably missing from the Case-Shiller Index list are Houston (#4), Philadelphia (#5), San Antonio (#7) and San Jose (#10). Minneapolis (#48) and Tampa (#55) are included, by contrast.* This means that most U.S. home sales are not included in the Case-Shiller Index’s monthly findings. Case Shiller tracks 20 markets that have high regulatory parameters, causing values to be artificially high in those areas, and creating speculation on a limited number of units.

§  A second flaw is that it doesn’t measure supply or demand, which is the true measure of any product. Over 50% of the cities are not forecast as growth areas by the Census Bureau. Supply and demand imbalances are the ultimate driver behind real estate prices, and local, regional as well as national data shows the balance is improving, with months of resale supply recently declining from 12 to 10 months nationally and much less here locally.  Normally, those inventories are approximately seven months, and until the overhang of unsold homes is reduced, prices will not recover.

§  Another Case-Shiller flaw is how it measures a change in home price. Because the index throws out all sales except for “repeat sales” of the same home, the Case-Shiller Index fails to capture the “complete” U.S. market. It also specifically excludes condominiums and multi-family homes. In some cities — such as New York and Chicago — homes of these types can represent a large percentage of the market.

§  Another limitation is that the Case-Shiller Index is on a 2-month delay. The Case-Shiller Index is far less useful than real-time data of a city or neighborhood.

§  Also, the Case Shiller index relies exclusively on transactional data from home sales, a flawed methodology since less than 0.5% of homes are sold each month. That is too small a sample size from which to make broad conclusions about the national housing market,

§  The biggest problem with Case Shiller is that current market transactions are not representative of overall market trends.