[WSJ] The Crazy 8: Comparing Results of National Home Price Indices

Posted by Jonathan Miller - Saturday, June 9, 2012, 1:18 PM

Matthew Strozier over at WSJ with Column Five (a large producer of infographics) presented an interesting side by side of 8 national housing indices.

All but one index shows a year over year decline in housing. Trulia’s new Price Monitor by Jed Kolko would be a great addition once the year-over-year history is established. It was also interesting that NAR’s Existing Home Sales was omitted (I’m not advocating).

Beyond the obvious price decline, my takeaways were:

US indices are general in sync on the year-over-year. Our confusion in the monthly barrage of housing metric releases is that most push the month-over month.With the proliferation of these indices, data subscriptions must be getting cheaper. There are a few more out there as well.Of the indices presented, their data collection and methodologies vary significantly (where disclosed) yet their results were consistent perhaps suggesting the 7 for 8 result is coincidence as opposed to an aggregated trend.Sales prices are not something we should be obsessed with as an indicator of market health (think Las Vegas, mid decade). I’d much prefer seeing more attention paid to sales trends since they are a pre-cursor to price trends if you are trying to reasonably answer the question: Has the US housing market hit bottom?

It is interesting and my rough understanding that most of these indices were created and run by economists, scientists or data wonks, many for Wall Street purposes with virtually no real estate types. That’s obviously fine until you consider what is said in barrage of monthly press releases for some, citing things that are not empirically measured in their respective reports, i.e. weather, inventory, etc. that create further confusion.

I’d love to see a side by side comparison of the lag time from the point of “meeting of the minds” between buyer and seller for each index. The significant lag time reflected in this index genre is a practical one due to the massive scale of information, but I think it would give consumers (who were generally not the intended users of any of these indices at the time they were created) a better sense of reliability for each.

National housing indices provide useful tools for setting government economic policy but the consumer’s obsession with the idea of a national housing market and it’s relevance to their local markets is, well, crazy.

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Why US Housing Indices Make Terrible Investment Benchmarks

Posted by Jonathan J. Miller -Tuesday, February 28, 2012, 3:00 PM
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[Source: PDF]

Analysts have had an easy time forecasting the future results of the Case Shiller Home Price Index with reasonable accuracy. This is because the 3-6 month lag from the actual “meeting of the minds” to reporting period results as well as the lower costs to acquire data to analyze.

If savvy analysts can accurately predict the index in the coming months, then how does this encourage investors to get on both sides of the trade. Call me crazy but if I knew what the index results would be in the coming months, that would mean that most market players would know and then it’s not possible to beat the market (sorry traders, but this is my weak attempt to talk like a trader).

The chart above is a forecast found in a recent housing study. It’s how I currently envision the US housing market given the millions of distressed property sales that need to go through the system.

The S&P/Case Shiller Home Price Price Index’s reason for being, as well as other competing indices were intended to be a benchmark for Wall Street to hedge housing using options (derivatives). This would have served a very logical and useful purpose to be sure but it has been a dismal failure. In one of the most volatile housing markets in history, trading volume has been anemic or non-existent, or at a fraction of the volumes needed to be an efficient market. Still, S&P/CS has become the consumer benchmark as the media grapples with how to characterize the market. The data problems and years of messaging bias over at NAR Research have enabled alternatives like S&P/Case Shiller and Corelogic.

The S&P/Case Shiller December report published today, (2 months after the close of the period, reflecting October-November-December closed sales, reflecting August-Spetember-October contracts) reflects a continuing malaise in US housing even though the 2011 housing market got a reprieve thanks to the robo-signing scandal at the end of 2010 and the anticipated settlement agreement between the major services and the 50 US state attorney generals.

Data through December 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed that all three headline composites ended 2011 at new index lows. The national composite fell by 3.8% during the fourth quarter of 2011 and was down 4.0% versus the fourth quarter of 2010. Both the 10- and 20-City Composites fell by 1.1`% in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% respective annual rates both reported for November. With these latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006.

What’s interesting is how many don’t seem to understand what the index represents. Here’s a not uncommon interpretation via AP:

The declines partly reflect the typical slowdown that comes in the fall and winter.

No they don’t – the indices effectively washes out seasonality, both through the seasonal adjustments made to the index and the methodology itself. The non-seasonal adjusted results are virtually the same – and the methodology doesn’t reflect certain truisms like the surge that occurs in nearly every spring market since the dawn of time (or at least since cable tv was invented).

December 2011 S&P/Case-Shiller Home Price Indices [Standard and Poors ]
Survey: Prices declined in 18 of 20 cities in final months of 2011 [AP/WaPo]

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