Economist's Commentary: February 15, 2008
Competing Home Price Data — the Inside Story
By Lawrence Yun, Chief Economist
A recent Wall Street Journal article points out that home price trends are divergent, depending upon the source. Housing economists are very cognizant of these differences, and I’d like to expand upon a few additional points not covered in the article.
First, the NAR home price analysis captures the median value of home transactions that come from the Multiple Listing Services. It lines up home values from low to high and chooses the middle home and its price. Had we chosen to compute the average home price change, then we would place a very high weight on those multimillion dollar homes. However, NAR strictly focus on the median, or the middle, price. This method assures that all homes are treated equally. In our latest survey of 150 metro markets, we found that 73 markets had price increases from one year before (from the fourth quarter in 2006 to the fourth quarter in 2007) and 77 markets experienced price declines. Though there is a mix-of-homes problem in NAR price data, most people find our series useful for its timeliness and because — in general — the price trends as first announced by NAR are generally reaffirmed by other price series at a later point.
Secondly, the Case-Shiller price index — which has been gaining more media coverage as of late — covers only 20 markets. Most of these 20 markets coincidentally tend to be located in California, Florida, and other down markets. As a result, the index shows that most of the 20 markets are experiencing price declines. The media, in turn, then puts up a headline like “Home Values Falling Severely in Most U.S. markets.” For the average busy consumer, a headline like this will surely dampen their confidence about buying a home. This is total distortion of market conditions based on a small selection of falling local metro coverage.
A government agency — the Office of Federal Housing Enterprise Oversight (OFHEO) — also surveys home prices from 287 local markets and found that nearly 70 percent of U.S. markets are showing price increases (the latest data is as of third quarter 2007). Yet, the OFHEO survey gets far less coverage than the Case-Shiller index. Perhaps the media is intent on looking for sensationalized headlines. After all, the media is in the business of selling news, and more sales can be made with sensationalism. (I have been told by few reporters off-the-record that they are interested in increasing their viewership even if it means putting things out of context.)
Another point that is never covered in the media is the weighing system used by each survey. As with NAR, the OFHEO price index also essentially computes price changes by placing equal weights on all homes. All homes are treated equally.
By contrast, the Case-Shiller index places a vastly higher weight on multimillion dollar homes. Evidently, not all homes are important according to Case-Shiller. That’s a pity, and an approach that flies directly in the face of the American sense of democratic values.
Another factor that rarely gets attention is that Dr. Shiller, a Yale professor, has a side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to “scare” the market.
One final point: people are hedging their bets based on information reported by the Case-Shiller index, but the trading is extremely thin. That means that the futures valuation is determined not by the massive market but by only a handful of traders. With this caveat in mind, so far among the few trades that have taken place the people who bet that prices will fall by more than is implied by the futures contract have lost money to the people who bet that prices will not fall as much as implied by the future contract (according to an analysis by Dr. Andy Leventis).
I would avoid any investment that is thinly traded. If you do decide to take leap into a thinly traded market, be VERY careful. If it is any comfort to those who lost money on a Case-Shiller home price futures contract, I would suggest that they contact Dr. Shiller about price revisions. Their methodology requires constant price revisions. What is reported today will get revised next month — in two months — in three months; theoretically forever. Case-Shiller has not been forthcoming about their revisions. If I was on the losing end of a contract bet — I would demand to know more about revisions. Keep trying, as the data is constantly revised.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.
