Thursday, June 12, 2008

Realtors Shoot the Messenger. Another Messenger Fires Back.

The National Association of Realtors attacks the S&P/Case-Shiller Home Price Index.

Unhappy with the falling numbers coming from S&P/Case-Shiller, NAR has decided to attack the messenger. Also on the attack is Bernice Ross, whose book, Waging War on Real Estate's Discounters: How to Unlock the Door to a Full Commission, suggests her interests lie with real estate agents, not the public.

However, Matt Carter of Inman News responds by punching holes in the attacks on S&P/Case-Shiller.

What really seems to rankle NAR is the fact that the S&P/Case-Shiller index is widely considered to be the most accurate of the various home price indexes. S&P/Case-Shiller is considered to be the best for several very good reasons.

First, unlike NAR's housing data, both OFHEO and S&P/Case-Shiller track the same homes over time. This gives both OFHEO and S&P/Case-Shiller an advantage over NAR.

Second, unlike S&P/Case-Shiller, OFHEO's data is restricted to homes with conforming mortgages. This causes OFHEO to underweight high-priced areas like California. (Ironically, the wording of NAR's attack on S&P/Case-Shiller—
"it gives more weight to the Pacific Coast, where prices have been volatile"—makes it seem like the flaw lies with S&P/Case-Shiller, rather than OFHEO.)

Third, unlike S&P/Case-Shiller, OFHEO's index doesn't just track purchases, but also appraisals for refinanced mortgages. The flaw here is that there can be a big difference between what a house appraises for and what it can actually sell for. Soon after S&P/Case-Shiller released their index, OFHEO felt the need to respond by releasing a purchase-only version of their own index.

However, to be fair, I should point out a problem with S&P/Case-Shiller as it gets reported in the news. There are actually multiple S&P/Case-Shiller indexes: one national index, twenty metropolitan indexes, a 10-city composite index and a 20-city composite index. The national index is the best measure of the U.S. as a whole. The metropolitan indexes are the best measures of the 20 individual metropolitan areas covered. However, the 10- and 20-city composite indexes are not measures of any actual, cohesive geographical area. And since they focus on big cities, where housing is most overvalued, they tend to over-exaggerate the housing decline. But, since the national index only gets released quarterly, while the 10- and 20-city composite indexes get released monthly, journalists report the composite index numbers about three times as often as they report the national index numbers.

Hat tip to the Housing Derivatives blog for pointing out both NAR's attack on S&P/Case-Shiller and Matt Carter's rebuttal.

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