One of my favorite online columns at the Wall Street Journal is “The Numbers Guy” – by Carl Bialik. He tackles the foggy issue of housing indexes this week, which have entered the mainstream conversation over the past few years. (My firm was nearly acquired by one of the firms in the piece before I pulled the plug as the financial markets began to crack. Phew!)
In “Only One Person Knows a Home’s Value: Its Buyer: House-Price Index Readings Can Be Inflated, Built on Shaky Foundations and Far From the Right Neighborhood“, Carl makes the case that:
The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.
The S&P/Case-Shiller Index is perhaps the best known housing benchmark and was the first major index to the space. One of it’s authors, professor Bob Shiller, is well known for his bestselling book. As a result, it has become the index most often cited in the media and perhaps most subject to attack by competitors, and by various segments of the housing industry who don’t like the sharp declines it has been reporting.
The real irony here is that CSI and others were created to enable the sale of financial instruments so that investors can better manage risk or simply follow the US housing market in aggregate….not for individual consumers to track their local housing markets in real time, given the lengthy delay in some of the index reporting schedules (CSI releases September data next Tuesday).
Yet in one of the weakest housing markets in years, significant trading activity appears to remain elusive in this business space and their application is expanding into the consumer space.
But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren’t sure that sale prices reflect the values of houses not on the market.
Carl’s column does thrash the indexes quite a bit, but in their defense, their day will certainly come as data collection gets better and faster, and markets for these products evolve as investors begin to understand them. I suspect this will occur at the point where Wall Street is able to reinvent itself.
Its going to be interesting to see how long acceptance is going to take to achieve. I suspect it will be measured in years.
After all, it’s freezing out there.
Much of my locale is something other than a Metropolitan Statistical Area so I guess you could call us neglected.
However, OFHEO, or whatever its alphabetic successor now is, publishes an index that purportes to report that re-sales of residences encumbered and re-encumbered with conforming conventional loans are in steep “adjusted” price decline. Repeat that does not count anything considered “subprime.” I have asked what the adjustments are and can’t get an answer. Long story short, the OFHEO, or whatever, is a best as a prediction of how the out-of-area underwriters are viewing the market and as a prediction of what is going to happen as sources of funds dry up when the reports are released.
If we knew how the actual sales prices are massaged for inclusion in the report the thing may be useful. Or at least we could explain why it isn’t necessarily an accurate reflection of what we think is happening.