(This is Part 1 of a two-part series. Read Part 2, "Where’s the beef in home-price reports?")
"Real estate prices are plummeting!" "Foreclosures are at an all time high!" "Prices predicted to decline another 20 to 30 percent!" These are the headlines that we face daily. It’s no wonder that there’s a crisis in consumer confidence. The truth of the matter is that the sky is not falling. In fact, contrary to what the press is reporting, real estate prices are stabilizing, and in a wide number of areas they are actually showing signs of improving.
The S&P/Case-Shiller Index is the gold (scare) standard these days for those who report on the housing market. News agencies began using this index about two years ago rather than the indices provided by OFHEO (the Office of Federal Housing Enterprise Oversight) and NAR. These same news sources often fail to report the numbers provided by companies such as Realogy.
If each of these resources came to the same conclusion about the market, there would be no issue. The challenge is that NAR, OFHEO and Realogy all reach the same conclusion: Prices are down nationally less than 1 percent and, in many areas, prices are actually increasing.
In contrast, the most recent numbers from the S&P/Case-Shiller Index (reported on April 29, 2008) reach a very different conclusion:
"Data through February 2008 … show declines in the prices of existing single-family homes across the United States … The 10-City Composite posted a new record-low annual decline of 13.6 percent and the 20-City Composite recorded an annual decline of 12.7 percent."
According to David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, "There is no sign of a bottom in the numbers. Prices of single-family homes continue to drop across the nation. All 20 metro areas were in the red for February-over-January reading. In addition, 19 of 20 MSAs (Metropolitan Statistical Areas) are reporting negative annual returns. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking six consecutive months."
Now compare these numbers to those reported on April 22, 2008, by OFHEO. The OFHEO "Monthly Price Change Estimates for the U.S. and Census Divisions from January 2008 to February 2008" drew the following conclusions:
1. Overall U.S. prices were UP 0.6 percent.
2. Regions reporting increases include the Pacific (0.3 percent), West North Central (1.3 percent), West South Central (0.7 percent), East North Central (1.6 percent), East South Central (1.2 percent), New England (2.2 percent), and Middle Atlantic (0.1 percent.)
3. Only two regions reported declines: (Mountain -0.6 percent) and South Atlantic (-0.2 percent).
In other words, a whopping 77 percent of the areas in the U.S. reported a price increase between January 2008 and February 2008! The S&P/Case-Shiller Index, in contrast, concludes that 95 percent of the MSAs reported negative returns. Of course, there’s no mystery as to which of these two reports has been in the press.
What accounts for this difference? Both the S&P/Case-Shiller Index and the OFHEO index use "repeat valuations." In other words, to be included in the calculations, a property must sell twice. The difference in the two sets of sales prices is the basis for each index. OFHEO’s sales-price data include only homes that have conforming mortgages. The Case-Shiller Index covers property sales with both conforming and jumbo mortgages.
Andrew Leventis (June 2007) attributes part of the difference to the fact that OFHEO "does not lend additional weight to more expensive homes; each pair of home valuations is given equal weight in the index estimation, regardless of the price level of the home." In contrast, Case-Shiller applies a "weighting" formula before it calculates it data. The challenge with making decisions about how to "weight" certain factors introduces human judgment into the equation and dramatically increases the probability for creating errors.
NAR and Realogy, using a different approach from OFHEO and S&P/Case-Shiller, arrive at essentially the same conclusion as OFHEO, i.e. that the average price of homes in the U.S. was down less than 1 percent. Their approach is to total up all the sales, divide by the number of units, and then calculate the arithmetic average (mean) as well as the median. In stark contrast to the S&P/Case-Shiller approach, the technique that NAR and Realogy use includes all properties and is much more objective.
From a scientific point of view, when two sets of data produce conflicting results, you look to other sources and/or methodologies to see which data set is supported. In this case, the NAR and Realogy data supports the OFHEO data. It’s the S&P/Case-Shiller index that lacks corroboration from other sources.
Unfortunately, the press almost universally quotes the S&P/Case-Shiller Index, and it may be the least accurate housing-price index. Next week’s column explains why.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate’s Discounters" and "Who’s the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.
Ross will speak at Real Estate Connect in San Francisco, July 23-25, 2008. Register today.
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