News analysis: Where's the beef in Case-Shiller attacks?
Analysis of differences in home-price reports
By Matt Carter, Monday, June 2, 2008.Bookmarking Sites
In back-to-back Inman News columns, Bernice Ross wades into the controversy over the reporting of home-price statistics. In Part 1, "Put a gag on Chicken Little," Ross argues that home prices are stabilizing, but that the media's emphasis on home-price indexes published by Standard & Poor's/Case-Shiller has created "a crisis in consumer confidence." In Part 2, "Where's the beef in home-price reports? "she details the bones she has to pick with the Case-Shiller index.
Ross raises some legitimate points -- there is no doubt that some consumers don't understand that those headlines screaming about national home-price declines don't necessarily reflect what's happening in their market. But in placing the blame at the feet of Case-Shiller and the media, Ross fails to get to the bottom of the question she claims to address: Why do Case-Shiller's numbers differ from those produced by NAR and the regulator of Fannie Mae and Freddie Mac, OFHEO?
Before your eyes glaze over, the numbers all have their uses; their differences are easily explained, and they boil down to this:
1) Case-Shiller and OFHEO look at repeat purchases and exclude new-home purchases, but OFHEO also throws in appraisals that are generated when people refinance their homes. As we have all become very cognizant of lately, what a house will appraise for and what a house will actually sell for on the market can be very different things.
2) OFHEO doesn't consider transactions involving loans that are too big or too risky to be guaranteed by Fannie and Freddie, and acknowledges that homes with these mortgages on the upper and lower price ranges are seeing bigger price declines than the homes it tracks.
3) NAR looks at sales of existing homes listed by MLSs, and reports median home prices, which reduces the impact of price volatility in upper price ranges.
The result is that the Case-Shiller index can show more extreme swings in price -- both up and down -- than NAR or OFHEO's numbers.
There are actually three Case-Shiller indexes -- monthly 10- and 20-city surveys, and a quarterly report that looks at all nine U.S. Census regions. The monthly survey is the one people tend to get the most worked up about, because it looks at 20 metropolitan statistical areas that include hard-hit areas like Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Diego and Washington, D.C. -- all of which have experienced double-digit price declines in the last year.
To the extent that the monthly Case-Shiller index can mistakenly be interpreted -- by a cursory reading of a headline, perhaps -- as representing the state of the nation's housing markets, that's a problem. And Ross is not alone in pointing out that Case-Shiller can also miss trends in micro-markets, like Manhattan, because it doesn't track sales of condos and co-ops.
But Ross, echoing an opinion piece written by NAR Chief Economist Lawrence Yun in February, also wants to make the case that the media and Case-Shiller are purposely misleading us.
"The S&P/Case-Shiller Index is the gold (scare) standard these days for those who report on the housing market," Ross complains in her first column. "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."
In his opinion piece, which was also published in the Wall Street Journal, Yun said he sees the media as being "in the business of selling news, and more sales can be made with sensationalism." Yun confided that he personally has been told "by (a) few reporters off-the-record that they are interested in increasing their viewership even if it means putting things out of context."
I'm not aware of any serious news organization that has stopped reporting numbers from NAR or OFHEO. And while some newspapers and Web sites may get a short-term boost in readership by sensationalizing a story, in the long run, becoming a trusted source of information is the key to success in the news-gathering biz (television and tabloid news excepted).
Yun also goes after Robert Shiller, the Yale economist who helped develop the Case-Shiller index, claiming that as a co-founder of MacroMarkets LLC, he profits from the trade of housing and futures options on the Chicago Mercantile Exchange and has a financial incentive to "scare" the market.
"The more hedging of bets that occur, the more profits go into Dr. Shiller's bank account," Yun claims. "And more hedging of the bets will take place if people believe there will be a crash in housing values."
What Yun neglects to mention is that price increases also spark trades, and that a reliable benchmark of housing prices is an absolute necessity for such trading to occur. The Case-Shiller indexes are calculated by Fiserv Inc., and maintained by a committee of industry experts who follow a set of published guidelines.
Like reputable journalists, the people who publish the Case-Shiller indexes know that their product is worthless if it's perceived as biased or concocted to serve a purpose other than providing the customer with the most current, most objective information.
Ross, the author of "Waging War on Real Estate's Discounters," takes a similar poke at the credibility of the motives of those who produce the Case-Shiller indexes, claiming NAR, OFHEO and Realogy are more trustworthy:
"Ultimately, the question is whom should you believe -- the academicians and Wall Street with their complex derivatives that gave us the subprime mess, or NAR, the federal government and the real-world numbers from publicly traded real estate companies?"
Never mind that Shiller had nothing to do with the excesses in lending during the housing boom, or that his warnings of the inevitable consequences were dismissed by the industry. Here's an excerpt from NAR's Dec. 1, 2006, Realtor magazine:
"Robert Shiller scored instant media celebrity when his 2000 book, 'Irrational Exuberance,' predicted the tech bubble's explosion just weeks before the fact. Four years later, when he tried to apply the same principles to the real estate boom, he found out that all investments don't behave alike. Shiller contended that rising home prices weren't based in the fundamentals of population growth and supply and demand; they were bubbles, destined to pop. To the contrary, NAR economists predicted that market slowdowns would largely be gradual -- a trend that's playing out today. Shiller's failed bubble scenario demonstrates that sometimes even smart guys get it wrong."
Yun and Ross are mostly too busy shooting the messenger to take a serious look at why the Case-Shiller numbers tend to show bigger price swings than those produced by NAR and OFHEO. Both make a big deal of the weighting formula used to draw up the Case-Shiller indexes.
Yun says the weighting "places a vastly higher weight on multimillion-dollar homes" -- an approach, he claimed, that "flies directly in the face of the American sense of democratic values." That might get your blood boiling -- especially if you don't live in a multimillion-dollar house -- but what does it have to do with mathematical and statistical principles that may or may not justify weighting?
According to Standard & Poor's, weighting is designed to make sure that the indexes aren't unduly influenced by "atypical" sales. A home that sells more than once in a six-month period is not included in the index because it may be a fraudulent transaction, is not an arms-length deal, or follows the redevelopment of a property. Less weight is given to homes that have large changes in price relative to others in their area because the home may have been "remodeled, rebuilt or neglected."
Ross calls the system "absurd" because "lenders don't look to computer-generated models to make lending decisions; instead they rely on those buyer and seller 'mispricing decisions' (i.e. comparable sales) to determine how much they will loan on a given property."
Hmmm ... or maybe lenders should have been more careful about those buyer and seller "mispricing decisions?" Whether or not you believe it makes sense to exclude sales that might be distorting home prices because they stand out like a sore thumb from other comps, Standard & Poor's says 85 to 90 percent of sales aren't weighted at all.
OFHEO's most recent study of the differences between its home-price index and the Case-Shiller indexes suggest that the effect of value-weighting high-priced homes is relatively small, and that the gap between the indexes is not explained by different price trends among the most expensive homes (Ross, in arguing that weighting is a problem, cites an older OFHEO study in which the authors admit that OFHEO's attempts to recreate the Case-Shiller weighting formula were "imperfect.")
According to OFHEO, what seems to be propping up prices in its own index is the use of appraisal data (when borrowers refinance their homes), and also what's happening to the price of homes that are purchased with mortgages that are NOT guaranteed by Fannie and Freddie (i.e., subprime and jumbo loans). Until April, Fannie and Freddie were not buying or guaranteeing mortgages larger than $417,000. Now the government-sponsored enterprises are allowed to go up to $729,750 in high-cost areas.
"Price declines seem to be particularly large for low and moderately priced homes without Enterprise-purchased mortgages," OFHEO said in its January report, "Revisiting the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes: New Explanations."
Removing appraisal valuations reduced the gap between the OFHEO and Case-Shiller indexes from 4.3 percent to 2.7 percent. When OFHEO plugged in price data from DataQuick on sales of lower-priced homes with mortgages not backed by Fannie and Freddie, it found that the gap was closed by another 1 percent, to 1.7 percent.
So, if you are looking at purchasing a really cheap or a really expensive home in a market that saw a lot of subprime lending that's covered by the Case-Shiller index, perhaps it's not "the leader in inaccuracy," as Ross claims. On the other hand, if you're looking at a home that's in the median-price range, NAR's numbers might be a good bet. And if you're looking to buy an existing home in the one of the hundreds of markets covered by OFHEO that didn't see lots of crazy lending practices during the boom, that index might be a pretty good indicator of what's happening with prices.
Whichever index you choose, none paints a rosy big picture, although that doesn't stop Ross from trying.
Ross gets off on the wrong foot in her first column, beginning the discussion with an apples-to-oranges comparison between an April 29 Case-Shiller report and an April 22 OFHEO release.
The Case-Shiller price declines Ross cites (12.7 percent in the 20-city composite) are for a limited number of MSAs over a one-year period. Ross compares the Case-Shiller numbers to a slight month-to-month increase in prices (0.6 percent) for the entire country from OFHEO. Annual versus monthly. MSAs versus national. And the point is?
Ross doesn't tell us what timeframe she's referring to when she states "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 fact, the latest numbers from NAR show that in the last year, median home prices have fallen 8 percent (NAR doesn't report seasonally adjusted month-to-month changes). Realogy, in its latest report to investors, says average home prices in transactions handled by Realogy Franchise Group were down 7 percent during the first quarter compared to a year ago. OFHEO puts the year-over-year average price decline at 3.1 percent, and says peak-to-trough, prices are down 3.7 percent since April 2007.
Because OFHEO slices its monthly numbers up into nine Census divisions (rather than MSAs) and prices were up in seven of those divisions in its April 22 report, Ross claims "a whopping 77 percent of the areas in the U.S. reported a price increase between January 2008 and February 2008!"
But the same report showed year-over-year price declines in six of nine Census divisions. The latest, most detailed numbers from OFHEO (which came out after Ross wrote her columns) show first-quarter price declines in 43 states in the "purchase only" index (which excludes refis) and quarterly price declines in all nine Census divisions. In the "all transactions" index, which includes refis, 128 of the 292 ranked MSAs saw quarterly price declines.
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Submitted by Silence Dogood on June 2, 2008 - 12:32pm.
Very well written...puts the news in "Inman News."
Thank you for taking the time to read comments to your articles and addressing the concerns of readers! Web 2.0 at work...
Submitted by Niki Scevak on June 2, 2008 - 1:58pm.
Simply, an excellently written critique Matt! Really enjoyed reading it.
Submitted by Daniel Ferguson on June 2, 2008 - 2:29pm.
An excellent analytical review of the issue which I found to be very well researched and presented.
Submitted by Mark Burson on June 2, 2008 - 2:39pm.
I agree with the latter comments, but I will add that it sounds like we are writing off the over all market conditions. Of course there are pockets of sound and robust activity, but as I see it, this is very much like my filght instructor use to say, "Any landing you can walk away from is a good landing." We are not out of the woods yet (so to speak), and there are lots of buyers, investors, builders, mortgage brokers, and real estate agents walking away. Meanwhile, back at the hanger, humpty dumpty will be working for some time to come.... putting the plane back together.
Submitted by RK Ruthman on June 2, 2008 - 2:56pm.
People are no longer trusting of "numbers", especially if the group presenting the numbers has something to gain.
It is like a drug company doing their own studies, and declaring a drug safe while people are dropping dead.
"....Yun also goes after Robert Shiller, the Yale economist who helped develop the Case-Shiller index, claiming that as a co-founder of MacroMarkets LLC, he profits from the trade of housing and futures options on the Chicago Mercantile Exchange and has a financial incentive to "scare" the market.
With that said:
Realogy*, the world's largest real estate franchisor, that includes real estate brokerage, relocation and title services, Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, The Corcoran Group®, ERA®, Sotheby's International Realty®, NRT Incorporated, Cartus and Title Resource Group...
Would Realogy profit if their numbers were taken as gospel?
*Realogy was acquired by Apollo Management LP, a leading private equity and capital markets investor.
I believe both sides are not a accurate barometer.
Report it like the weather, "here's what's happening in your neighborhood".
Submitted by Gary Lucido on June 2, 2008 - 3:24pm.
Well, I think the NAR has more to gain from distorted numbers than Robert Shiller so guess which numbers I'm going to believe?
Submitted by Dave Wirsching on June 2, 2008 - 3:31pm.
Excellent reportage. Thanks for laying out facts in as clearly as possible.
Submitted by Sean OToole on June 2, 2008 - 3:33pm.
Matt - awesome work - it is nice to see some real reporting on these indexes without the spin.
The scary part to me is that all these indexes are the best tools the Fed and our policy makers have in trying to steer this really big ship right now. The reality is that in hindsight all of these indexes have been too slow and too broad to report just how fast things deteriorated in the hardest hit markets. While no one likes to hear bad news I'd personally rather hear it early and have a chance to prepare.
Same will be true on the upside. These indexes will show it well after it has begun.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Josette Skilling on June 2, 2008 - 3:49pm.
The explanation of each metric's relative value was great for those of us who understand the market as well as we do. But for the average consumer I think it simply adds to the fear they have of making a purchasing mistake with a vast amount of money since they just don't know which numbers to trust and can't necessarily slice it down as neatly as you did.
Love the comment above about "here's what's happening in your neighborhood."
Submitted by Stacey Pfeifer on June 2, 2008 - 5:42pm.
Thanks for this excellent piece. It will help me to discriminate with more deftness all the future articles I'll read on this subject.
I just wish some fast-working engineer would create a site where agents,brokers, mls, could post housing stats in a standardized format that could be crunched and then chopped up by geographical area, zip, census regions, county [your choice] and sort of mashable as to type of report you'd want to see. Also, it would have a separate area for comments about each market's conditions... maybe that could be crunched too by key words or something..all in a clean ui. map search etc.
In addition, it would pull in regular NAR, S&P/Case-Shiller and OFHEO stats that you could drop and drag into your report for a comparison....and industry news articles and opinions in the comment mash up!
ah well, it makes my head hurt anyway you slice it.
Submitted by Todd Anderson on June 2, 2008 - 5:58pm.
Great writing here! It's nice to see someone trying to show both sides of an argument.
The thing I remember most from Statistics 101 is that you can make the numbers say pretty much whatever you want if you choose the right numbers. There will always be people out here spinning them to fit their needs, it is our job to help people read the truth in them.
Thanks for a great piece of news writing!
Todd Anderson
www.YouInParkCity.com
Submitted by Deborah Madey on June 2, 2008 - 6:25pm.
Thanks for a very well written article! You focused on reporting instead of sensationalism. Keep reporting.
Deborah Madey - Broker
Peninsula Realty Group
Submitted by Lynn Madison on June 3, 2008 - 5:51am.
Thanks for a great analysis of the issue. As an instructor who has the privilege of speaking to Realtors throughout the country this will help me clarify all the mis-information they have and hopefully will help them do a better job with their clients. Kudos!
Submitted by Dan Homan on June 3, 2008 - 6:06am.
What? Lawrence Yun thinks other indicies are biased? Thank God we have such a fine honest young man who always provides accurate and honest information regardless of how bad it makes his employer look. NOT!!!! Give me a break. Actually Mr Yun should praise the Case Shiller index because it since it shows 12% or better decrease in values so far this year, when coupled with Mr. Yun's unbiased and compleatly accurate prediction of an overall decrease his year, that means there would have to be over 10% increase in values over the next few months, meaning that the fires are lit and the market is on the rise again.
You said, "To the extent that the monthly Case-Shiller index can mistakenly be interpreted -- by a cursory reading of a headline, perhaps -- as representing the state of the nation's housing markets, that's a problem." If you can't "bottom line" your conclusions, you come across as lacking the subject knowledge and communication skills needed to give yourself credibility. NAR lapdog Yun always tempers his conclusions with appologies and couched terms. Perhaps if he cut the crap he would be taken more seriously.
I think that by and large Realtors should avoid the statistics as it seems almost a badge of honor for most agents to mention how poor they are at math, that they missed all the math questions on the licencing exam, and can't calculate the monthly payment on a home with all the required information - annual taxes, insurance, a mortgage table and the total amount financed. When you have 1.6 Million idiots who will take a home selling at 25 times the annual rent and tell a buyer it is a great investment because appreciation has been 35% over the last three years (that is +35%, +35% and -35%)it is reassuring that they have hired a no nonsense, honest as the day is long, tell it like it is, unbiased, numbers person like Lawrence Yun. I think the only reason Mr. Yun is so down on Case Shiller is that he has to toe the NAR line until a position opens up at Move, Inc.
Submitted by George Percel on June 3, 2008 - 6:35am.
The old adages hold true: figures never lie, but liars figure. Bad news sells more newspapers than good news.
While national statistics may have a role in national policy, they may not accurately reflect the state of the local markets. Real estate remains local and always will react to local influence. Too many people may not choose to sell or buy, because of the more glaring negativity being reported in national stats. Even local newspapers prefer to report the national bad news versus the possible local good news.
I think a caveat should be placed on all reporting of national statistics that the reader should consult with an expert in their local market for a full understanding of the LOCAL market conditions.
Submitted by Brad Bramer on June 3, 2008 - 7:41am.
There is no doubt the real estate market has been through two huge swings up and down in the past several years. What I fail to find reported on from the media is the long term trends in the real estate market and the fact that there isn't a "National Market" as seems to be reported and most importantly perceived by the media's audience. Let's not forget the vast majority of media consumers rely on their news source to make decisions in their lives.
What I've read and watched from the news media over this period of time hasn't been deceitful but instead has been presented to tell a story in the most negative view.
There is no question certain niche markets are experiencing a greater adjustment but that has always been expected and adjustments in those markets will fall back into the long term 5-6% appreciation timeline the majority of the real estate world lives in.
As a realtor I was relieved to read "Put a gag on Chicken Little," by Bernice Ross. Thank you Bernice!
As our country sorts through the real estate rubble of mortgage fraud, 100% LTV's, ARM's and everything else that attributed to "The American Dream" let's not forget these niche markets are not the majority of America.
We all need to go through this together so let's not dwell on the ugly facts for so long and remember there are still markets "Today" that are showing long term appreciation.
Brad Bramer
RE/MAX Elite
Albuquerque, NM
(505) 515-8836
Submitted by Jerry Hoffman on June 3, 2008 - 8:26am.
Matt,
Actually you make the same point as Bernice so I'm not sure why you criticize her. Her point
was clearly stated as to why Schiller numbers are different in "Where's the Beef?" - It is in the methodology as stated---
"According to the methodology materials, the S&P/Case-Shiller Index does not include price data from 13 states. Market conditions in those 13 states have, on average, been stronger than in the rest of the nation. OFHEO's estimates indicate, for example, that three of the five fastest-appreciating states in the nation (Idaho, Montana and Wyoming) do not have representation in the S&P/Case-Shiller index … The S&P/Case-Shiller index also apparently has incomplete coverage in 29 states." ---
Her point, as was your point, related to methodology. (Note to George: As I recall the adage it is "Figures Lie and Liars Figure."
Pick and choose the numbers you want to manipulate the data to support your opinion.
Real Estate is local. So when a caller on one of my listings indcated SallieMae says the market needs to drop 30%, there for my listing should sell for 30% less than the comparables, all I could do was laugh. This consumer gets his misguided information from the media, based on a nationwide generalization and thinks it applies to a local market. He failed to understand that the media choose to sensationalize the market as best they can. There is obviously plenty of bias to go around when it comes to reporting data.
As an agent in the trenches, I choose to educate my clients on the local market with real numbers, rather than some nationwide manipulation. Unlike the media, the only self interest I have is to help my clients with accurate, local numbers, which rarely coincide with the nationwide media manipulations.
However, more to the original point, when the media presents the negative spin (if it bleeds it leads; blood sells, etc.) the consumer has the opinion the market will continue to decline and they should wait to buy a new home. I many areas, this actually reduces demand by keeping buyers out of the market and force those who "have to" sell, to reduce their price.
Be as critical as you want of the NAR - there is room for it. But keep in mind their motivation tois to benefit the real estate industry. However, the wall street "spin masters" are strictly and solely interested in making a buck for their investors.
Rather than follow prognosticators from either side as lemmings, we should all do our own reaseach in our local markets and educate our clients. That may not be sensational and it may not sell papers or e-zines, but it will sell homes.
Submitted by Jerry Hoffman on June 3, 2008 - 8:48am.
Note to Brad -
Right on the money!
Submitted by Matt Carter on June 3, 2008 - 7:14pm.
Jerry: Bernice raised some valid points, and neither of us explored all the issues related to the differences in methodologies. But we were not making the same point at all.
What seemed unfortunate to me was that she started with the assumption that the indexes produced by OFHEO and NAR are valid, and that Case-Shiller is "the leader in inaccuracy."
My point was that if you actually take an objective look at them, each of these different approaches have their merits -- it depends on what you want to look at.
Bernice's point (to summarize very loosely) seems to be that the Case-Shiller index was dreamed up largely for the benefit of Wall Street investors and newspapers. But she provides no real evidence to substantiate that claim. Neither did the person who made it first, NAR Chief Economist Lawrence Yun.
By impugning people's motives, rather than taking a serious look at the differences in the indexes (sorry, "indices") or the way they are reported by the media, I think they leave themselves exposed to the perception that they're just engaged in an exercise in spin themselves.
By the way, I think it's perfectly reasonable to put yourself in somebody else's shoes to try to understand the motives for their actions. It's a great place to start an inquiry -- but you had better not start building a belief system around your assumptions unless you find evidence that confirms them.
I think George Percel hits on a key point that we've all been missing: "While national statistics may have a role in national policy, they may not accurately reflect the state of local markets."
Yeah, we all know that bit about how all markets are local, but have we done much thinking about why we need statistics about a national housing market at all? If you are a national lender, a national real estate brokerage, a national builder, a national policymaker, or a national regulator, you need these statistics just as much as plants need water, sun and nitrogen.
If you are a consumer, you may be affected by these statistics indirectly (because they may affect lending standards or housing production, for instance). But Bernice and everybody else who worries about the impact of the way these statistics are reported is right -- a lot of people see national numbers and think they refer to their local markets.
So now we get into the other debate: whose fault is that?
Jerry Hoffman has a client who calls him and thinks he can a better price on a listing because "SallieMae says the market needs to drop 30 percent" and that's the media's fault? Is it also the media's fault that somebody thinks SallieMae is suddenly taking the expertise it's gained in guaranteeing student loans and applying it to the national housing market?
Brad Bramer comments that from what he's seen, the media isn't necessarily deceitful but likes to present a story "in the most negative view." I know some people remember that the media was also blamed for helping fuel speculation during the boom, with stories of double digit price appreciation and the profits to be made flipping houses.
Brad wants the media to minimize its contribution to the boom/bust cycle by reporting more on long term trends (and by making it clear that there is no "national market"). That makes sense -- especially in reports that are published on the Internet, where the space constraints of newsprint aren't as much of a concern.
But is a short news brief on a home price index -- which is often all the space these reports get -- really the place to bring consumers up to speed on things that any reasonably financially literate person should know?
George would like to see media reports include something like the warnings that accompany over-the-counter drugs -- "a caveat should be placed on all reporting of national statistics that the reader should consult with an expert in their local market for a full understanding of the LOCAL market conditions."
It seems like the question for real estate pros then, is this: Are you putting yourself out there as an expert on local market conditions -- on your Web site, blog, or wherever? Are you knowledgeable, are you available?
Let's give home buyers (and sellers) some credit, and not forget that once somebody gets serious about buying a home, they are likely to immerse themselves in the wealth of information on their local market that's now available to them on the Internet. Can consumers get this information from you? Are your listings up on sites that are providing it?
National statistics have their uses, but for the most part, consumers -- and the real estate agents who serve them -- probably needn't concern themselves with them.
Submitted by Jerry Hoffman on June 4, 2008 - 8:15am.
Matt,
As with most discussions, the points to be made start deviating from the original point.
When I objectively look at the foundation of an index like Case-Shiller and realize 26% of the states are excludced from the statistics, it loses credibility as a "national" index or guide for trends. When I look at "who" the index originator serves, that tells me of their motivation. Anybody connected directly or indirectly to investors on wall street, have only one motivation and it has nothing to do with the average consumer on the street. I think the point that S&P/Case-Shiller is used by hedge funds, clearly indicates the link to wall street. S&P/Case-Shiller is used by investors - period. The extrapolation that it serves wall streeet isn't a stretch in the slightest. After decades of misconduct by wall street insiders and misreporting of financial condition by major corporations and wall street players, don't we all have reason to be skeptical? As for Case-Shiller being inaccurate, Beernice also indicated significant areas were Shiller claimed to have 100% of the market covered, but they arbitrarily excluded major segments of the real estate market in those same areas. Objectively, if an index tells me it is national but excludes 26% of the country, I have doubts. If an index tells me it covers 100% of a market, but excludes any legitimate segment of the market, it adds to the skepticism. So "Putting a Gag on Chicken Little" (her original point) has merit. With the media predicting trends on manipulated data and painting the entire country with the same brush, it is telling the consumer to stay away. Less demand creates falling markets. The media is reporting a manipulated guessimate as to what will happen and the consumer believes it. Hence a self-fulfilling prophecy. I still have clients believing the market will continue to fall, based on media reporting of manipulated projections. Reporting in the boom years by the media would be area "X" had an average price increase 13% over the same period in the previous year. It had happend. "Flippers" were making money - it had happened. That is not to say the "media" didn't report projections. However, your point about reporting appreciation or earnings from flipping was reporting fact, not a guesstimate. The media didn't fuel the boom. The lenders (extrapolation to wall street isn't that far) created the demand to fuel the boom, by giving a loan to anybody with a pulse. But this takes us off on another track again and that train has a long way to go.
Both indices have merit for their own purposes. It is the motivation/purpose that directs the spin. NAR is more industry and consumer oriented. S&P/Case-Shiller is wall street. I believe Bernice substantiated her point clearly. How much credibility would the public give to a headline that says "The nationwide real estate market is dropping 30% per year, based on this nationwide index that excludes 26% of the country. This index also covers 100% of the market, except of the parts we don't want to include."
Submitted by Keith Davis on June 4, 2008 - 12:44pm.
Matt: Very nice work. You do a great job of explaining the situation and citing support for your arguments. Thank you.
Jerry Hoffman:
You state: "Unlike the media, the only self interest I have is to help my clients with accurate, local numbers, which rarely coincide with the nationwide media manipulations."
You also state: "It is the motivation/purpose that directs the spin. NAR is more industry and consumer oriented. S&P/Case-Shiller is wall street."
As to the first statement, I believe that your self-interest, as an agent, is to close a sale. Your commission depends upon it. Long-term, your self-interest includes helping your customers, as it will lead to repeat and referral business. But short-term, your self-interest is to close the deal. So, please don't try to cloak yourself with having only one self-interest - helping your clients. That is disingenuous.
As to your second statement, NAR is clearly industry oriented, but I disagree with you that it is consumer oriented. Just look at the NAR's stated mission (available at its website): "The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful." Nothing in there about helping consumers. Nope, the NAR's mission is to help its members become more profitable. The members are more profitable when their commissions are rising (whether through higher prices or higher transaction volumes, or both). So keep that in mind when you want to know what NAR's motivation is, and thus how it directs their spin, including the commercials (remember the "Suzanne researched this" and "It's a great time to buy and sell" ads?) and predictions that NAR puts out (and, looking at 2007, continually kept revising as the year got worse and worse and their initial predictions proved worthless).
None of the indices are perfect. Matt acknowledges that. But people are mistaken when they argue that only the S&P/Case-Shiller index suffers from imperfection so it should be ignored, but the OFHEO and NAR indices are to be believed. All have their faults, and all have their biases. As Matt suggests, understand what the indices actually report and take each one with a grain of salt based upon their own strengths and weaknesses.
Submitted by Jerry Hoffman on June 4, 2008 - 3:59pm.
Note to Keith: 99% of my business is referral and past clients. I do conduct my business in a manner that helps the client make the best decision for themselves - it is not to close the deal. That is not disingenuous. Worry about the money and you will forever have money worries. Worry about the client and the money will be there.
Matt's position is that Bernice did not support the argument and I believe she clearly stated the facts for her reasoning. Bernice's point that the media reports, sensationalizing the market based on manipulated statistics does not accurately reflect the market and is counter productive, is correct.
Validity of any index you wish to use should be approaced with a great deal of skepticism. The motivation is key and wall street cannot be trusted. NAR's efforts to promote homeownership is clearly consumer oriented. Yes, selling more houses makes more money for licensed agents. I don't agree with some of the NAR positions, but they are mostly industry and consumer oriented. The NAR code of ethics is clearly consumer and industry oriented. Promoting homeownership is good for everybody - period. Promoting minipulated data for profits sake for some hedge funds benefits neither homeownership, the consumer or the real estate industry.
Ultimately we all agree that these prognosticators are far from perfect. Knowing the Case-Shiller is only 74% of the country and where they say they are 100% coverage is really somewhat less than 100% allows me lots of salt for the fries.
Submitted by Keith Davis on June 4, 2008 - 6:16pm.
Jerry: As to Bernice's point, I think Matt is right. Bernice is decrying one index based on its apparent flaws, but she is not pointing out the flaws in the other indices. As to using those indices to "reflect the market," well that depends on how you define the market. As you have stated, real estate is basically a local market, so any index based on a broad region will not accurately reflect what is happening in a particular locale. But to say that reporters should therefore ignore it does not make sense. Look at the unemployment rate, for example. The national rate is reported all the time, and yet it says nothing about the local employment conditions. But we can't expect the press to simply ignore the rate simply because it may not accurately reflect local employment conditions.
And I just have to comment on your defense of NAR as being consumer oriented. NAR's efforts to promote homeownership are not clearly consumer oriented - they are NAR oriented. Promoting homeownership means more sales for NAR members. I quoted their stated mission, and it is to make their members more profitable and successful. Absolutely nothing in their core mission says anything about helping consumers. The NAR code of ethics is basically a marketing tool. Who enforces those ethics? What are the penalties for violating them? Face it, they are toothless, and just a marketing tool to help their members sell their services.
And "promoting homeownership is good for everybody - period" is not true. That is too broad of a brush. This country, from the Bush administration to NAR to Fannie Mae to Countrywide to countless others, have been "promoting homeownership" over the past years, and it has led to the biggest bubble in real estate in generations. Homeownership is right for some people, but not all people. Some people (such as some military personnel) move so often that the transaction costs make buying cost more than renting. Some people are just not in a position to buy, and need to learn to budget and save before they do. This belief that homeownership at any cost is a social good is part of the reason we are where we are today.
Submitted by Matt Carter on June 4, 2008 - 6:59pm.
Jerry, please note that Case-Shiller produces three price indices: monthly 10-city and 20-city composites, and a national index that is released quarterly.
Lawrence Yun, in his opinion piece, and Bernice, in her first column, were complaining that what happens is that the public sees media reports on the Case-Shiller 10-city and 20-city composites, and think that they describe the national picture. We are all agree they do not.
We also seem to be in general agreement that what consumers want to know is what is happening in their local markets. When you make an apples-to-apples comparison between the OFHEO and Case-Shiller 10-city composite, as OFHEO did in its research reports (see links in original post), you find much of the difference between the indexes is accounted for by the fact that in addition to repeat transactions, OFHEO is also relying on appraisals that are conducted when borrowers refinance. In addition, OFHEO does not look at loans that are too risky or too big to be purchased or guaranteed by Fannie Mae and Freddie Mac. That suggests that the OFHEO index understates price swings in these markets.
Bernice and Lawrence want you to believe that the difference between Case-Shiller and OFHEO's numbers in these markets is due to weighting used by Case Shiller, which Yun claims places "a vastly higher weight on multimillion dollar homes." OFHEO looked at that particular weighting issue, and found it wasn't a factor (there's another weighting method, employed differently by both Case-Shiller and OFHEO to adjust for the length between transactions, that does have an impact. It ain't huge).
If you really want to get into the separate issue of the Case-Shiller national home price index (and I'm not sure why we would, if what we want consumers to do is look at what's happening in their local market), YES, Case-Shiller's coverage is not complete -- and it's even worse than you think. But let me explain why that's not a big deal.
There's no dispute that "three of the five fastest-appreciating states in the nation (Idaho, Montana and Wyoming)do not have representation in the S&P/Case-Shiller index."
But how much of the U.S. residential housing market do those three states represent? Less than 1 percent.
Here are the 13 states Case-Shiller has no coverage in for their national index, and the dollar value of those markets as a percentage of the U.S. total:
Maine (0.4 percent)
Indiana (1.9 percent)
Wisconsin (1.8 percent)
North Dakota (0.1 percent)
South Dakota (0.2 percent)
South Carolina (1.1 percent)
West Virginia (0.4 percent)
Alabama (1.2 percent)
Mississippi (0.6 percent)
Idaho (0.4 percent)
Montana (0.3 percent)
Wyoming (0.2 percent)
Alaska (0.2 percent)
The numbers are from the Case-Shiller methodology linked to in the original post.
But wait, there's more! There are 29 other states where Case-Shiller has partial coverage.
All told, of the $9.689 trillion in U.S. residential property value, the Case-Shiller national index covers markets valued at $6.68 trillion, or 71 percent (even less than the 74 percent you give them credit for).
But so what? What we need to be asking is whether this is a representative sample of properties that gives us an accurate picture of the national housing market.
When you see a national opinion poll, would you be distrustful if the polling firm only surveyed 213 million people (70 percent of the U.S. population)? The fact is, you can get very accurate results talking to just 2,000 people -- if you are careful to pick a representative sample.
Does Case Shiller have a representative sample? Does NAR? Does OFHEO? How about you tell me, if you still want to make the argument that "less than 100 percent allows you lots of salt for the fries."
Submitted by Jerry Hoffman on June 4, 2008 - 9:57pm.
OK Guys - This train keeps vering off the original track, but that is what usually happens with a vigorous discussion.
I fully understand the concept of statistical population analysis, standard and average deviations, population sampling, etc. As you get into the minutia of the statistics, it proves what we already agree on - none of them are are perfect. The point being is, the average consumer is not given the benefit of those grains of salt. The media reports them as fact and without clarification. Yes Matt, they should report the news, but objectively and without sensationizing the facts. The point is valid. The self serving prophecies will be fulfilled. The media does not objectively report these issues. Its just like taking a sound bite out of context and presenting it as news. The purpose of the Shiller index is to serve the hedge funds. That point does not seem to be in contention. With that in mind, I'll salt my fries.
Off on one of the other tracks briefly. Matt - homeownership is a huge benefit to society in general. There is insufficient space and time to state the obvious, but there is adequate information available to educate yourself. Promoting homeownership and being reckless about it, for the purpose of lining your pockets (read "by lenders") are two diametrically opposed issues on another track. When I said I don't agree with all of the NAR positions, raising loan limits and easing qualifications is something I don't agree with. Putting people into mortgages they can't afford is a detrement to not only that consumer, but everybody either directly or indirectly. Hence risk based pricing, among a myriad of other issues. That nonsense is laid squarely at the feet of the lending institutions and wall street. Keeping banks out of real estate is probably the biggest focus the NAR should have. Reasonable and rational loan guidelines served us well for decades. In the boom years, real estate kept the economy floating when the rest of it was anemic at best. But this is another issue and another track.
It is a shame you totally discount the fundamental purpose of real estate agents, the code of ethics and the fact that real estate is a service industry. Therefore, you feel "closing" the deal is the only reason we are here. With that attitude, it is clear why the public has little trust in the profession. So obviously, we will never agree on the benefits of the COE or most of the NAR efforts. It is also the attitude that causes NAR to require ethics training. Please attend with an open mind.
Submitted by Matt Carter on June 5, 2008 - 9:01am.
Jerry -- I don't have a problem with home ownership or real estate agents in general. Not sure where you're coming from with that.
As far as Case-Shiller and guilt by association with hedge funds, that was one of my problems with Bernice casting aspersions on "academicians and Wall Street with their complex derivatives that gave us the subprime mess."
What gave us the subprime mess was the packaging of mortgage loans into mortgage-backed securities (MBS), collateralized debt obligations (CDOs), and other securities that made it difficult for investors to gauge the risk involved. Robert Shiller had nothing to do with that. The flood of investment dollars into mortgage lending helped artificially inflate real estate values beyond what could be supported by the fundamentals, as Mr. Shiller warned during the boom -- warnings that were dismissed by NAR (see original post).
To suggest that the Case-Shiller index is not accurate simply because it is used as a benchmark for the sale of housing futures (in Chicago, by the way) is a nonstarter. If traders don't believe the Case-Shiller indices are put together in a fair and objective manner, they will not participate in that market -- just as (discerning) consumers will not patronize media outlets that purposely sensationalize or distort the news.
Submitted by Jerry Hoffman on June 5, 2008 - 8:23pm.
Sorry Matt, It was Keith's comments I was responding two in those last two paragraphs.
If the consumers follow your premise I expect the Enquire will fold soon. The traders only want to make a buck. If their favorite index makes any suggestion accurate or not, they will use it to play the market. The market can be, has been and will continue to be manipulated by misinformation.
Headline in Inman today was (paraphrased) "There is no bottom to the market in Santa Maria, Ca" - this is based on a land developers remarks. Now he wouldn't have any ulterior motive in falling prices. So the public sees this and prices fall farther, becasue a land developer says so.
Every index should carry some disclaimer.
Submitted by frederick blair on July 7, 2008 - 10:31am.
Very good article but does not convince me that Case-Shiller is receiving undue criticism. The index is flawed and biased as the article illustrates. Other indices have their own bias but are far more representative of the overall market.
The real problem is that the media chooses to do the dog and pony show with C-S. For certain the sensationalistic headlines are contributing mightily to the current economic mess. Who is going to buy when the sky is falling?