The ironically named SmartMoney had a blog post yesterday raising the issue Should You Ignore Housing Data? That depends.
You should keep tabs on the health of the housing market if one of the following is true:
a) You are a person involved in the real estate business, including brokers, bankers, developers, and the construction trades.
b) You own, or hope to own, a house.
c) You rent real estate.
d) You have a financial interest in the health of the US economy, for example if you work in the US or any of its major trading partners.
To be fair, the post does not claim that the market for houses is not important, only that the data is too hard to understand, so you should just forget about it and go back to watching reality TV.
Okay, I added in the TV bit. For illustration.
Yesterday S&P released the monthly Case-Shiller Home Price Index numbers. It was down “nearly 3%” for the year ended March ‘12. And yet last month the National Association of Realtors reported that median house sale prices for the same period were up 2.5%. Apparently, the contrast between these two is enough to give up on tracking house prices. Too confusing. Brain hurt.
Alternatively, a person could take the time to understand how the two sets of numbers are calculated, decide that the Case-Shiller was useful and that the NAR is useless, and carry on.
The NAR number comes from a simple calculation. Take all the existing (that is, not new construction) houses sold in a month. Find the median price. Publish.
There is something to be said for the virtue of simplicity. But in this case, if your interest is in which way the value of the nation’s housing stock is going, elegance does not imply practicality.
The goal is to estimate the current value of houses in the US, relative to previous values. The problem is that all you have to work with are prices for the comparatively small subset of American houses that happened to be sold last month. If that sample of houses were fair and unbiased, for example if the government randomly selected 100,000 houses each month and auctioned them off, then the NAV number would be a fairly accurate way to estimate the value of houses overall.
Of course, the houses sold in one month is not anything like an unbiased sample of the housing stock. In any given month more or fewer high-end or low-end houses could change hands. If more $500K houses are sold this month than last, even if those houses only got sold because they were marked down from $1M, the NAR median price will show an increase.
It would be as if we calculated stock market indices based on the average price of all shares traded during a day. On days in which high-priced stocks such as Apple and Google had news and thus high trading volumes, the index would be up sharply.
Stock market indices are actually based on looking at each individual stock in the index, comparing the latest price, that is, the price from the most recent trade, to the last price from the previous day. That will give you a return number for each stock. If you take a (weighted) average of those returns you can get the return for the index.
The Case-Shiller Index is based on the same logic. For each house that was sold, you compare the price on the sale to the price for that particular house the previous time it was sold. Translating from those returns, which are for a variety of time periods ending in a single month, into an average return number for that month, involves some nasty math. (Which math is Karl Case’s biggest contribution to the field of economics.) But the core idea is simple enough for even SmartMoney authors to grasp. Compare the prices of this month’s sold houses to their own previous prices, not to the prices of last month’s sold houses.
(Or maybe not. A close reading of the SmartMoney post makes it clear that the author, typically, does not really understand her material. After a half-hearted explanation of the differences between the indices, she ends by telling us that “experts say” that the Case-Shiller might be more useful for “higher-priced homes.” Huh?)
As I pointed out the other day, in terms of monthly payments Houses Have Never Been Cheaper. That is still roughly true, although as it happens the March 2012 BMA Housing Cost Index was up a tad on February, to 4505 from 4479. Interest rates were up just a bit, to 3.95% from 3.89%, and although the Case-Shiller 10-city composite was down on the month, it was down only 0.09%.
But wait, I can hear you thinking, I thought Case-Shiller was down nearly 3%. Well, on a year on year basis, March 2012 compared to March 2011, it is down 2.85%, which a person could call nearly 3% if they are the sort of person who thinks 19 is practically 20. Most of the decline was in the second half of last year. The year-on-year was –3.70% in February.